How A Strong Economy Impacts Credit Card Usage

What are the benefits of a strong economy? When the economy is strong, job growth lowers unemployment rates. People often see their wages increase, which can increase spending and boost revenues. A strong economy also boosts investment in new businesses and technologies. One area that people often fail to consider is the effect of credit card usage in a strong economy.

By the end of 2018, the number of U.S. consumers with at least one credit card was nearing 179 million. Per the Federal Reserve, consumer credit card debt was at $14.73 billion by the end of 2018. By the second quarter of 2019, it had increased to $15.13 billion. How does a strong economy impact the use of credit cards?

A Strong Economy Increases Purchasing Power

Inflation is an important factor in consumer confidence. A strong economy can tank quickly if prices increase too much and cause the value of the dollar to plummet. If demand is high and supply doesn't match, prices will increase, which drops the value a person gets for their money. To make sure consumers have purchasing power, the federal funds rate is adjusted to prevent inflation.

“The Federal Reserve adjusts the federal funds rate eight times a year. The rate dictates what it costs financial institutions to borrow money,” says Bill Hardekopf, CEO of credit card comparison website LowCards.com.

When the rate is high, it costs financial institutions more to borrow money from larger banks. In return, they raise their prime rates, which increases the amount consumers pay in interest. No one wants to pay more.

When it's low, lenders and credit card companies lower prime rates to increase consumer spending. With a low interest rate, consumers are more likely to take out a mortgage, buy a new car, or charge a larger purchase to a credit card. When the rates are higher, consumers become cautious and limit their spending. All of that impacts economic growth.

Right now, people are spending. They're using their credit cards to pay for vacations, upgraded electronics, and other household items. They're upgrading kitchens and improving their homes. Of those people using their credit cards, the Federal Reserve found that just over half of them pay off their card each month, others pay in installments, which keeps money circulating through the economy as interest is collected.

Consumer Confidence Boosts Spending

With low interest rates and increased wages, people are spending more money on homes, cars, groceries, entertainment, and travel. That stimulates the economy. Each new purchase puts money in businesses' hands. With the increased revenues, they can keep hiring more workers and increasing pay and benefits. That keeps the strong economy going. People start seeing more in their 401k accounts, bank accounts, and wallets and that ensures consumers keep spending.

As the economy started its slow recovery in 2010, consumer spending was at 10500 billion. Today, the strong economy has helped increase that to almost 13254 billion in 2019. The numbers show Americans are spending more.

More People Qualify for Credit Cards

The other benefit to a strong economy is that companies that offer credit cards have loosened some of the restrictions put in place after the Great Recession in 2008. People with poor or no credit had a harder time getting credit cards. Spending slowed down. As it's easier to get credit cards in a strong economy, college graduates with low credit scores because they have yet to build up a credit history find it easier to qualify for credit cards. People with low credit scores aren't automatically denied. More people have cards and can use the cards to make purchases, pay them off, and build up a positive credit history.

Is It All Positive?

Is it all good news? People are spending, businesses are making money, credit card companies are signing more and more consumers up. Isn't that good?

A strong economy is important, but consumers shouldn't get too confident and overspend. While the number of credit cards has increased, delinquency rates went from 1.59% in 2015 to 1.94% in 2018. This is expected, but if the delinquency rates continue to increase, it could become a problem.

When consumers don't pay back the money they've spent using credit cards, financial companies must recover that money somehow. They'll sell the debt to a debt collection company for a percentage of what they're actually owed or they'll write it off as a business loss. That impacts the economy in a negative way. People now have lower credit scores and spend less. Banks lose money and become more restrictive when it comes to approving certain loans.

Owning a credit card does require one to be responsible for repayment. Don't spend more than is feasibly paid off. Be responsible. It's also important to shop around for a card with the best terms in regard to annual fees and repayment terms along with a low APR.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.