Credit Cards And Their Impact On Global Finance

by Emily on April 22, 2018

in Articles

‘I want to go shopping but have no account balance to spend.’

‘Why don’t you just swipe your credit card?’

This may have become one of the most commonly used catchphrases of the twenty first century. And there’s a good reason why. Every second in the UK, 126 purchases are carried out using credit cards. They are one of the most popular financial products and there is certainly no doubt about that.

Even with absolutely no cash and no balance in your account, you can still go shopping around the world. For shopaholics, this is nothing less than nectar of the gods.

Needless to say, credit cards are a boon but there is also no denying that they can become a curse if not managed well. But this isn’t something that the banks will tell you. Nor is it something that you will hear at the time of being handed your credit card. For this reason, we will be discussing certain aspects related to credit cards in this article.

Credit Card Debt

It would be unfair to say that each individual who uses a credit card fails to pay their due on time and contributes to debt. But if we were to inform you of the status of credit card debt in the UK and USA, you will be compelled to believe that it could actually be the case.

As of today, the total credit card debt in the UK is close to £70bn, whereas in the USA it amounts to over $1 trillion.

Just to give you an idea of how huge these numbers are, let us make a comparison. The total GDP of India is close to $2.4 trillion, so the credit card debt in the USA is almost half the GDP of the sixth largest economy in the world. This figure clearly indicates that the misuse of credit cards may have infiltrated many households.

The credit card balance of an average UK household is estimated to be around £2,504.

The credit card balance of an average American is estimated to be around $6,375, which has risen by almost 3 per cent compared to last year.

It not only sheds light on the unhealthy financial practices that so many people indulge in, but also speaks of the possibility that a recession may be just around the corner.

According to an analysis carried out by the Bank of England and FCA, most people in debt have a tendency to shift debt from one lender to another. This merely shifts the burden of the debt from one financial organisation to another but doesn’t really help the overall debt crisis in the country.

Credit Cards are believed to be one of the biggest contributors to debt, which led to a near collapse of the Wall Street in 2008 and introduced the world to the phenomenon of a subprime crisis, a mini recession in itself.

However, banks and financial institutions need to be more cautious now than they have ever been in the past. The global recession of 2008 had left a gaping hole in many economies around the world. A hole that took longer to fill than to create.

Relation between Credit Card and Credit Score

The next question that may turn up in your head is why are credit card companies continuing to issue cards to those who cannot pay back their dues. But why shouldn’t they, when the average credit score has increased as well?

As surprising as it may sound, despite the high levels of debt, the average credit score of a UK citizen is 380 on a scale of 0 to 700, with 380 qualifying as a fair credit score.

Credit scores in America range from 301 to 850. The average credit score of an American is 675, which is at its highest point since the recession.

Credit scores follow the principle of ‘the more the merrier’ and when the average credit scores are so high, it means that the banks view this segment of the society as potential credit card users.

According to the basis on which credit score is decided, these potential credit card users are also quite trustworthy in terms of paying their debt. But this may not be the first time that the numbers have lied.

In any rapidly growing economy, as the Purchasing Power Parity increases, the confidence to tackle debt increases too. As a result, many working individuals believe that irrespective of the size of the debt they may have accumulated, they will surely find a way to pay it back. But certainly not every individual got this bit right in 2008.

A Cyclic Effect

The slowdown of an economy can never be entirely blamed on one factor. If the personal debt of a nation rises beyond a certain point then one cannot say that personal debt is acting like the third wheel of an economy.

In the past few months, growth in earnings has been meagre and inflation has reached new heights, forcing households to seek help to manage their personal finances.

Personal borrowing on loans, credit cards and car finance has risen exponentially and now stands at almost five times the rate of growth in UK pay. These factors have indirectly weakened the pound and as a result the costs of imported goods have also increased since the Brexit vote.

Credit Card Debt Statistics

  1. When we speak about credit card debt, it not just includes those customers whose due date was just a day or two back. There are many people in the United
    Kingdom who have accumulated such debt over a long time, in certain cases, as long as two years.
  2. This has thrown further caution to the wind regarding the guidelines that are being followed by many financial organisations when providing customers with credit cards. Organisations are being asked to issue alternative finance to those who are credible enough to pay them back.
  3. Data collected from banks show that personal debts are currently at their highest and have reached a total of £200bn. Credit cards account for more than £70bn of the total personal debt.
  4. The subprime crisis of 2008 taught the banks that it is not a wise idea to lend make money to people with poor credit scores. One can say that the banks learnt their lessons and since then have only extended their finance to those with good credit scores. Thus, the growth in consumer credit at this time poses much less risk than the growth in consumer credit back in 2008.

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