Going Debt Crazy: What the Financial Crisis Did to Credit in the U.S.

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Debt

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Credit makes the world go around — at least, it fuels the United States economy, which for the time being is the largest in the world. Consumer crediting outstanding increased at a seasonally adjusted annual rate of 7.3 percent in December, according to a preliminary calculation by the Federal Reserve. Total revolving credit outstanding, largely tied up in credit card debt, increased by $5 billion, or about 0.6 percent, to $861.9 billion.

Credit card debt has a mixed reputation as far as economics is concerned. On the one hand, increases in credit card use and a reasonable accumulation of debt means that people are spending money and could signal improved consumer confidence. Given that nearly 70 percent of the U.S. economy is driven by consumer spending, both of these are generally economic boons, and credit cards play an important role in servicing the financial needs of consumers.

On the other hand, the irresponsible accumulation of debt can be destructive to personal finances, and from there, the damage can aggregate up to the economy at large. If a consumer abuses their credit facility and spends beyond their means to repay, they will bear the burden of high interest and be forced to dedicate future income to the service of the debt. This is good for the economy the moment they spend the money, but a drag in the long-term as they work down the debt.

We’ve run out of hands, but a third possibility is that people are turning to credit cards out of necessity. Large, unexpected costs such as medical bills, vehicle repairs, and winter heating bills (thanks a bunch, polar vortex) are often put to credit. In the event of unexpected unemployment, some people are forced to turn to credit cards to cover the cost of living.

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