February 08, 2024 | OPINION | By Zoraiz Zafar
Perhaps the most ingenious concept that capitalism brought with it was the idea of credit. Essentially, it allows you, the supposed rational economic agent, to buy something that you find supplementary to your utility function today, and pay for it at a later date. Theoretically and practically, credit has been a game-changer as it has inspired economic agents to think beyond their current fiscal boundaries. Instead of staring at an opaque glass ceiling, credit has allowed economic agents to use this financial extension to boost future income, thereby creating a positive feedback loop that could, in theory, lead to sustainable and compounding growth of personal wealth—but only if it is done right.
Even in industrialized, low interest rate markets, debt accrual is only seen as financially viable if the purchase is directed towards a capital good (a good that boosts your productive capacity and retains its value) at least for some period of time. On the other hand, accruing debt for the purchasing of a consumer good (a good that you consume today and that does not provide any future returns) is a big economic no-no, due to something called interest rates. You see, if you are paying a borrowing premium up until a loan payoff date for a good that brings you no or limited benefits after today, you are, in essence, letting the dealer whisk away your chips, one by one, without dealing you any cards.
Does this then imply that all credit card users are suckers who are stuck in a rat race that they will never win? Not at all, since most reputable credit card companies do not charge any interest, as long as you pay your full balance at the end of the billing period. This also means that it is in the credit card companies’ interest to have consumers carry forward their balance and keep accruing more debt, sinking deeper into financial quicksand. Unfortunately, in today’s inflationary and high interest rate environment, almost half of all credit card users in the U.S. find themselves being pulled into this quicksand by Adam Smith’s Invisible Hand.
Under the great ‘free markets’ experiment, wannabe-lenders in industries that formerly had nothing to do with lending have established credit institutions which, in my opinion, operate as bastions for neo-loan sharking. Take for example, Klarna, a financial institute that allows consumers to make purchases on e-commerce sites, such as Amazon and eBay among many others, in multiple installments instead of a full payment upfront. Overarchingly, it seems like a progressive and egalitarian innovation, giving more power to the consumer. But when the interest and late payment fees for the Gucci belt that you definitely could not afford upfront kick in, that is when you feel the burn.
Disturbingly, this trend of borderline predatory lending has ventured into other established industries and sectors as well. The higher education sector in the U.S. is arguably the biggest and most concerning example of this. With the cost of a college degree soaring nationwide in the past two decades, many for-profit, online and poorly run educational institutes have seized on the opportunity to get recently graduated high school students to sign on for hundreds of thousands of dollars in federally subsidized student loans. These loans, while seemingly directed towards an investment in education that should yield future returns, become an onerous burden on the fresh college graduates once they realize that the degrees are seen as unattractive by the job market. The lack of any marginal return analysis being conducted in the process is troubling and points to the inefficiencies associated with increased government intervention in a sector where it has no business being in.
The solution, therefore, lies not in more bureaucratic red tape, but in the individual. After all, the benefits to be gained from the credit markets are ripe for the taking. It is just the sour apples that you, the individual, must not choose. And it goes without saying: keep in mind how much your bag can hold; no one wants a ripped bag at checkout. Go on, then—spend away. Consumerism does not wait for anybody.