A Country Without Credit

February 5th, 2008 by David Weliver

With the economy faltering, more Americans are paring down their spending. At the least, Americans are starting to buy only what they can afford. Could the next few years become the age of Americans saying good bye to credit cards and living within our means? And if so, is life without consumer credit a fiscal utopia?

Consumer credit is like a passionate romance that sizzles, and then fizzles. Consumers are lured to the relationship with large credit lines and promises of being able to “afford” life’s luxuries, today. For a while, life is grand. Borrowers have no need for a budget, as minimum payments are low and credit lines are always available for unexpected expenses or if ends don’t meet, as they inevitably won’t. Consumers are enamored with their credit, and creditors love their consumers, unwittingly racking up balances that will make creditors a fortune.

Sooner or later, the honeymoon ends. Borrowers max out their credit lines and minimum payments are not so minimal anymore. Life gets tough, and consumers begin to resent the credit they so recently embraced.

In some cases, the relationship sours completely. Consumers can’t pay their debts, and creditors get abusive. Consumers are hit with late fees and higher interest rates, penalties on their credit scores, and possibly bankruptcy.

As more and more Americans find their relationship with credit falling apart, are we, as a nation, beginning to divorce our credit cards? And if so, is it a good idea?

Imagine a country without credit cards. After all, plastic is an invention of the last 50 years. Without consumer credit, we are all forced to live within our means. Sure, we still take out mortgages and auto loans. But gone are the days of borrowing to pay for purchases at the mall, at gas and grocery stores, or on vacation.

Yes, if the majority of Americans were to renounce credit, it would slow the economy. On a macro scale, our economy is accustomed to billions of dollars of consumer spending annually – a substantial portion of which is credit card spending. And a fraction of that is spending that we cannot afford.

If we suddenly remove that spending from the economy, it will suffer. But after a few years, we would begin to see the benefits.

As consumer debt decreases and saving increases, consumers will have more actual disposable income – not credit. When they resume spending, they will be spending within their means.

This eliminates creditor charge offs and reduces bankruptcy filings. The elimination of consumer credit also makes consumers more financially secure, so that in leaner economic times – and even in the face of job loss – the consumer, and in turn, the economy, is less affected.

When consumers divorce credit, they are forced to grapple with their true socioeconomic status Luxury brands, for example, are suddenly available to only those who can truly afford their price tags.

Temporarily, Americans “standard of living” decreases. But that soon reverses.

Without the cost of servicing debt, finance charges and late fees, Americans have more money in their pockets to spend. And by saving rather than spending, consumers actually earn interest instead of paying it.

The simple fact is that a lifestyle fueled by consumer credit is not sustainable. Whether or not we are reaching the breaking point remains to be seen, but I predict we will see both lenders and borrowers being more cautious with credit for the next three or so years, and then the cycle will start all over again.

It’s too bad, because I think eliminating consumer credit wouldn’t be the worst idea to come along.

What do you think?