Explore the impact of credit card debt with our comprehensive guide. Understand its implications and learn effective strategies for managing and reducing debt. Your key to financial well-being starts here.
When discussing credit card debt, the effects of debt are determined by factors such as the source of loan funds, the purpose for which borrowing is done, the terms and conditions under which the debt is floated, the volume of existing debt, interest rates, loan types used, and the general economic situation of the community.[1]
The individual may borrow from individual investors, financial institutions, and commercial banks. The effects of domestic borrowing are different from those of foreign lending.
Internal borrowing does not affect the total amount of resources available. Instead, it is a technique for the person to gain control of more domestic resources. Borrowing from financial institutions is simply a transfer of resources from private to government use.[2]
Individuals purchase government securities by diverting their current or previously accumulated savings after reducing their cash balances. So the above transfer of resources from individuals or institutions does not create any expansionary effects on the economy.
The effects of debt also depend on the purpose for which the debt is created. Borrowing is indefensible if the borrowed funds are used for wasteful expenditures, which will not make any assets.
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Further, the interest rates have a bearing on the cost of borrowing and consequently upon the banking system and economic conditions in general.
The stronger the demand for funds from competing investments, the higher the interest rate for borrowing funds.
A serious diversion of funds from marginal enterprises would cause the latter s failure, affecting production and other economic processes, like market prices and interest rates. If the financial institutions get tax exemptions for their loans, this will tend to encourage the purchase of their securities.
