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The Impact of Credit Cards on Consumption Behavior and Financial Well-Being

This presentation paper examines how credit cards influence consumer spending and saving patterns, particularly in the United States from 1970 to 2000. It highlights the popularity of credit cards, their convenience, and the tendency for increased spending leading to rising personal debt levels. The findings reveal a concerning trend of lower savings rates coinciding with credit card usage and demonstrate the impact on financial planning and decision-making. Recommendations are made for government policies to mitigate the risks associated with credit card debt and to educate consumers about responsible usage.

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The Impact of Credit Cards on Consumption Behavior and Financial Well-Being

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  1. ECO0401CGuided Study in Current Economic Problems I Carol Cheng 05678592 29 March 2006 Final Presentation

  2. Paper Title * How does the use of credit cards affect the consumption behaviour

  3. Introduction • Reasons why these issues arouse my interest • Credit cards are popular • Trendy  many promotions on the streets • Social issue  many in debts/go bankrupts • New form of payment method other than using cash • Spend more? Or save more? • Would I have better financial planning? • Substituting cash? • Change in money demand

  4. Introduction • Issues under investigated • How the use of credit cards affect spending and saving patterns • Credit cards and indebtedness • Change in money demand and velocity of money

  5. Data Sources & Methodology • Consumer’s consumption and saving pattern in 1970-2000 (selected years) of US, per year • Sources: Surveys of Consumers; Survey of Consumer Finances

  6. Findings/Analysis • How the use of credit cards affect spending and saving patterns • Features of using credit cards: • More convenient than using cash • Permit people spend more than they have • Smooth out consumption even when the income is low (e.g. emergency purchase) • Increase spending power, allow to enjoy luxurious lifestyle

  7. Findings/Analysis • How the use of credit cards affect spending and saving patterns • In US, people spend much more • Although the fact that the population was much larger in 1991, total personal savings was less in 1991 than in 1984 • A far smaller percentage of families (43.5%) had savings accounts in 1989 than did in 1983 (61.7%)

  8. Findings/Analysis • Credit cards and indebtedness • In US, most of the amount of consumer credit is generated by credit cards • Total (non-mortgage) consumer credit outstanding increased from $119 billion at year-end 1968 to $1,456 billion in June 2000 (in current dollars) • With little or nothing on savings, such people who cannot pay the debts would descend to delinquency and bankruptcy

  9. Findings/Analysis • Credit cards and indebtedness • In UK, the undergraduate students were relatively a low-income, but high-debt group • Some people may use their credit cards to buy as much as possible to make themselves feel better  shopaholics • Some people may use the cards to make more cash for other events (e.g. Gambling)

  10. Findings/Analysis • Change in money demand and velocity of money • Theory: higher probability of credit card ownership implies lower demand for transaction balances with no effect on small time deposit balances. • Source: William and John (1995), “Credit Cards and Money Demand: A Cross-sectional Study”

  11. I view credit cards, bank originated or other, as a temporary but probably unavoidable retreat in the campaign to develop an efficient domestic payments mechanism. --Donald D. Hester (1972), p.285

  12. Conclusion • Credit cards are unavoidable in the modern society • Electronic money dominate • “cashless” society soon

  13. Policy Recommendation • Government can • implement limitations on the profits from credit cards • Restrict mail and telephone campaigns offering various inducements to accept new credit cards • Educate the new generations  avoid credit card abuse

  14. The End* Thank you very much

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