Credit Cards

What about credit cards? In the United States at the close of the twentieth century, payments are often made by credit cards. But economists do not regard credit cards as money, because a credit card is not an asset.

What is a credit card? First, we need to answer another question: what is a "line of credit?" A "line of credit" is an agreement between a lender and a potential borrower, whereby the borrower can borrow up to some limit without any further approval. For example, if you were to build a house and act as your own prime contractor, you would need money to buy lumber and other supplies and to pay subcontractors from week to week. To do those things more conveniently, you might arrange with your banker to write checks for these expenses, even though you have no funds in the bank. Each check would be a loan, and the bank would honor them up to some agreed-on limit. Once your house is complete, you could refinance your loan as a long-term mortgage. This way, you wouldn't have to borrow the money (and thus pay interest on it) until you actually needed it.

If you have a credit card with XYZ bank, that means you have a line of credit with that bank, and the card is the proof that the bank is willing to loan you money.

Of course, many people use credit cards for routine payments, and pay their bills within the "grace period," never paying interest. This has proved so convenient that "plastic money" is now a very common way of paying for transactions. But the banks don't find that very profitable, so they have been trying to move away from it. More and more people use "debit cards" instead. When you pay by "debit card," there is no loan, and the amount is taken directly from your checking account. Of course, the checking account is money. Debit cards work pretty much like credit cards -- as long as you have money in your account!

But for an economist, the distinction between a credit card and a debit card is crucial. A debit card tansaction draws on assets that were there all along. By contrast, a credit card transaction creates a liability -- not an asset -- for the buyer, and the liability only comes into existence when the transaction takes place. It does not draw on pre-existing assets. And where there are no assets, there is no money.

Functions of Money