In a sharp turnaround from last holiday season, shoppers this year were not afraid to “boost the economy” by pulling out the plastic. According to First Data, consumer credit card spending increased 7% this past November and was still rising in December. While this is great news for big banking and credit card distributors (often one and the same), it has potential to be traumatic to family consumers trying to stay afloat.
But is this really a good sign for the economy? That depends on who you are and how you define the economy. Many economists side with the big bankers, defining a “good economy” as one in which money is flowing. Where the money comes from or how much interest is charged doesn’t matter to them; when the money is flowing, it heads in their direction.
I’ve spent my academic life focusing on language studies. When I try to define something, I tend to look at the word’s etymology. “Economy” comes from two Greek words and literally means “one who manages a household.” When someone says the economy is improving, I want to hear about the household economy. And I want to hear about the majority of households – the middle and lower classes of America. That is our economy. And while our economy is linked to “their” economy – the economy of big banks and credit lenders – they are not the same.
So: Is increased credit card spending good for our economy? The answer isn’t as clear as yes or no and depends on how smart people are with their credit cards. While it’s possible to make money using individual cards wisely, at least 1/2 of American households will pay interest fees on credit cards this year.
Debt Is NOT Good For Your Economy
According to the Federal Reserve, US consumers borrowed $20.4 billion in November, raising the total consumer debt for the nation to $2.48 trillion. Roughly $798 billion of that is in revolving debt, i.e. credit cards and other open lines of credit with potentially high-interest rates. The amount of outstanding revolving debt increased by $5.6 billion dollars. Today, the Federal Reserve announced another uptick of roughly $20 billion in December, with revolving debt now amounting to roughly $800 billion. That debt is outstanding; and, for an average interest rate, that increase in debt amounts to an additional $10 million per month in revenue for credit lending institutions. Their economy is indeed improving, but ours is not.
Adding debt will not improve your economy, especially if you find yourself paying loads of interest. So how do you stop the cycle? For most, the best answer is to cut your credit cards, delete the numbers from electronic wallets, and make a complete switch to a debit card that rewards you for spending money you have.
But if you do use credit cards, make sure you devote yourself full-time to monitoring your accounts to ensure you never pay a penny of interest. Make sure you pay off your balance monthly. Note that vendor refunds and promotional credits do not count as payments, so even if you bring your balance to $0 but you have not made a full payment, some banks will charge you interest. Based on the statistics, it seems that the best bet is to stay away from credit cards period. Spend wisely out of your own surplus, not futilely out of someone else’s shiny pocketbook. Do that, and our economy will slowly but surely improve.