Depending on who you ask, increased credit card use by consumers may be either boon or bane to the economic outlook. The fact that credit card use is rising is seen by some as an indication of increased consumer confidence and a willingness to spend that should spur economic growth. However, others regard credit cards as a net negative, hurting even those who don’t use them.
For the rosy assessment, Christine Hauser writes in the New York Times that “Ever since the United States emerged from the recession, economists have been watching for signs that Americans are spending again.” Never mind that many might question the assumption that the nation has completely “emerged” from the recession, Christine sees a first quarter increase in credit card spending as a positive sign that should spur economic growth.
“The dust is slowly coming off credit cards,” said Gregory Daco, a senior economist with IHS Global Insight, quoted in the New York Times’ May 13 article. “It is a general return of consumers to credit card usage, but it is a cautious one. Income is lower and slowly making a comeback right now.”
Several polls have showed use of plastic dropped dramatically in the early days of the recession, but that may be changing. MasterCard reported a 5% increase in sales during the first quarter of 2011, Visa a 9% increase and American Express saw a 13% rise.
The contrarian view was presented in an MSN Money article by Liz Pulliam Weston. “Recent research indicates that credit cards contribute to inflation and may impose unfair costs on people who don’t use plastic. Everybody pays more, in other words, so that some of us can snorkel at Molokini,” Weston says, referring to a vacation she paid for with rewards points.
Credit cards increase the money supply, because consumers can spend more than the cash they have on hand. More money chasing the same amount of goods leads to inflation as merchants raise prices in the face of higher demand. In addition, rising “swipe” fees paid by retailers have forced prices up, meaning prices are higher whether the consumer uses plastic or not.
Those fee structures have also become more complex, with four fee categories in 1991 rising to as many as 243 today for MasterCard alone, making it difficult for retailers to know and understand what they are paying. One large merchant reports that a credit card transaction costs them 14 times as much as accepting cash, but most consider the benefits more important than the disadvantages of taking plastic.