Question

Provide a detailed explanation on why consumer credit is important to the economy and specifically how is it impacting our economy today.

Answer 1

Consumer credit is the term used for debt taken by individuals to buy goods & services etc. Its importance to the economy can be understood from 3 perspectives as given below:

1. From the consumer's perspective:

1. Consumers get advance spending facility which may be necessary at times such as in cases of emergency or critical requirements.
2. Credit facilities such as credit cards promote a cashless economy.

2. From the viewpoint of businesses:

1. Revenues to businesses keep flowing consistently throughout the month/year as consumers do not need to wait for their salaries/paychecks to spend.
2. Businesses such as luxury goods & entertainment see enhanced cash flows as consumers spend more on these sectors due to the easy availability of credit that leads to the higher marginal propensity to consume (MPC).

3. Banking & Financial Services: Last but not the least, banking & financial service companies also benefit from consumer credit as interest rates on consumer credit, especially short term credits like those on credit cards are much higher than corporate interest rates. Also, they earn in forms of various processing fees, etc related to transactions involving consumer credit.