How Credit Card Use Led to the Financial Crisis

The use of credit cards in the 21st century is a record high. According to this source, each individual has at least two credit cards at this time. It is also common for these cards to have credit limits that are way beyond the actual capacity to pay of the credit card holder.

This situation led from one disastrous event to another leading to national credit card crisis and eventually a global financial crisis. It would be worthwhile to trace how bad credit card use contributed to the financial crisis in the past decade.

Step 1: To increase business, credit card companies launch tempting offers to consumers. This includes easy credit card access, and a credit limit that is beyond the annual income of the average consumers.

Step 2: Consumer gets a credit card and makes his or her first purchase to get a feel of it.

Step 3: Consumer pays the credit card company. Everybody is happy.

Step 4: Consumer now uses the credit card for routine purchases including groceries, regular shopping, movies and dinner dates. At the end of the month, he or she pays the credit card company. Again, everybody is happy.

Step 5: Consumer stumbles upon a tempting gadget that is bit too expensive for his or her income level. But wait, “my credit limit can help me afford it”, he/she realizes.

Step 6: Consumer takes out his/her card and goes home with a new toy. Beaming a big smile and thinking that this can be repaid in a matter of time.

Image-1Step 7: Consumer passes by a fancy restaurant and realizes that his or her credit limit affords him or her to taste something fancy once in a while.

Step 8: Consumer discovers holiday destination and realizes that his or her credit limit affords him or her to take some day off and lounge in the luxury of a world class resort.

Step 9: Consumer gets a bill from the credit card company and realizes that his monthly pay check is not enough to pay the total bill. Scared of the big penalty and interest rates, he or she uses his or her paycheck to pay the amount billed. The credit card company is happy. The consumer says, “it’s good that I have a credit card to pay for my groceries and the rent until the next pay check.”

Step 10: Consumer uses the credit card to buy groceries, pay the rent, pay the mortgage, and everything.

Step 11: Consumer gets the bill and is able to pay only half of the total amount billed using all of his or her pay check.

Step 12: Consumer uses the credit card to survive.

Step 13: Consumer pays a fourth of the total amount billed.

Step 14: Consumer uses the credit card to get through life.

Step 15: Consumer pays only 1/10th of the total amount billed. By this time, the interest payments are even higher than the monthly income.

Step 16: Consumer uses what remained of his or her credit limit to get by.

Step 17: Credit card company calls. Frantic that all of its clients are unable to pay.

Step 18: The banks write-off a large amount of loans. Financial institutions are on the brink of bankruptcy. The consumer gets laid-off. They all turn to the government for help.

You know what happened next.

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