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February 08, 2008

Are credit cards money?

Credit cards are being used by more and more people for everyday transactions. Even some fast food restaurants now take credit cards for payment. Does this mean we can consider credit cards to be money? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"In the technical or financial or banking sense, the answer is, 'No, credit cards are really short-term loans.' That is to say, if you don't pay the balance at the end of the grace period, you're going to incur an interest charge, and you're going to pay that interest over time. But in the practical sense, especially for people who do pay their credit card bills in full each month, they're actually a substitute for money. And people really use them like money. That is to say, people will carry them, and they will make payments like you said, maybe at a fast food restaurant or department store or for gasoline or whatever instead of having to carry cash or writing a check. And then at the end of the month, when that credit card bill comes, all your costs are on one nice bill, and people write one big check and pay it off. So in that sense, they are sort of a substitute for money. But again, if you don't pay off the balance, they're really a loan, and they're a short-term loan. And I should say that if you are going to use your credit card for a loan, primarily use it to buy long-lasting durable goods. Don't carry loans on things that you consume right away, like food and gas."

Posted by Dave at February 8, 2008 08:00 AM