Another Credit Crunch

Retailers who had been bracing for weak sales this holiday season were pleasantly surprised on Black Friday, as retail sales rose 3 percent to $10.6 billion nationally according to MarketWatch.

In the midst of the current recession and credit crunch, financial markets and lending institutions are pinching their pennies, but retailers have been slashing prices and offering strong incentives to lure consumers into their stores. So far it’s been working, but one has to wonder where the money is coming from.

The answer lies in your wallet. Credit card companies have long been fronting the cost of our consumer culture, offering easy access to whatever goods and services we want, from Starbucks coffee to a new LCD Television. This isn’t a bad thing. Credit cards are the oil that lubricates the heavy gears of our economy. A credit card grants you freedom from cash and the ability to get what you want when you want it.

But as the economy slows and Americans face new layoffs in addition to home foreclosures, perhaps it’s time to rethink the paradigm of buy now, pay later. Americans collectively hold 750.9 billion in credit card debt and the average interest rate on that debt is 12.82 percent. Given these numbers, what’s going to happen when more and more Americans cannot pay their bills? Credit card defaults have doubled in the past year to 10 percent, or more than $96 billion according to a recent article in Time.

Traditionally credit card companies have been able to weather economic storms through revenue generated by late fees and financing charges, but should the current recession get deeper and last longer, we may witness a second credit crunch, one that brings credit card giants to Capitol Hill in search of a bailout plan of their own.