The impact of personal credit cards on the economy over the past 50 years

By: Jackson Bill

So often things are invented because of a difficult situation or as the saying goes “necessity is the mother of invention”. One of the first personal credit cards - Diners Club - was created when a customer was short of cash and couldn’t pay a restaurant bill.

The first credit cards were very restrictive and designed primarily to create loyalty between customers and companies. Today personal credit cards are everywhere and are used by vast numbers of people. There is a distinction between charge cards like Amex and Diners where any debts must be repaid in full at the end of each 30 day period and credit cards like Visa and MasterCard where only a minimum amount is required to be paid each month with interest added to any funds not paid in full.

In the 1960s a major factor in the economy was the involvement of the banks in the distribution of credit cards. Over the last 50 years banking regulators have made changes to how such credit cards can be used such as the dealings between merchants and the banks which issue the cards.

Credit cards are popular because they are relatively easy to obtain and offer clients the ability to instantly make purchases especially with online shopping. Many bricks and mortar businesses have suffered financially because of online shopping which depends exclusively on credit cards for transactions.

The level of average debt for credit card holders continues to rise. Two obvious economic consequences appear to be the increased profits announced by the banks and the difficult financial circumstances of millions of personal credit card holders who are saving less and are now having to repay the interest on their increased spending.

‘The cashless society’ is a term used today and which came about because of the far greater use of credit cards which offer convenience, safety and a record of purchases in one handy statement. But there are downsides to the benefits of a personal credit card.

It can be argued that the economy overall loses because people spend their money on interest accrued from their card or cards. If someone has a debt of $10,000 and pays 20% in interest, that’s $2,000 a year not going back into the economy. If you are a shareholder in a bank you will be rewarded but the overall economy is missing out. Or is it? The credit card company employs staff to handle the clients using personal credit cards and these employees use their income to make purchases thus improving economic growth.

There are some who worry that poor financial management and increasing levels of debt are bad for the economy. Failed businesses and bankruptcies harm the economy and the human consequences too place a strain on budgets. The answer is surely a wise and prudent use of all financial matters including personal credit cards.

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