What if we all paid off our credit cards?

John W. Schoen Senior Producer • Profile • E-mail

As another month draws to a close, and we send off another payment to our credit card company, Bryan in New Haven, Conn., has had a little daydream. What would happen if we all paid off our credit card balances -- in full, all at once?

I'm not an economist, but a fantasy scenario crossed my mind and I've been trying to puzzle it through: What would be the long-term effect on our economy if all U.S. credit card debt was paid off? ... Assuming we stayed debt-free, how would this affect the lenders, banks, and other businesses? … It would never happen of course, but it got me wondering.
Bryan L. -- New Haven, Conn.

We get questions like this one all the time: what if we all got together and stopped buying imported goods? Or boycotted foreign oil or a specific brand of gasoline? Couldn't we all get together, like an enraged electorate, and "send a message"?

As you point out: it's not likely. When markets create a herd mentality, it's almost always a reaction -- usually sparked by fear or greed. Neither seems likely to motivate consumers to pay off debt.

In the case of a massive credit card payoff, a lot depends on where we all got the money to pay off the debt. (We're ruling out the prospect that lenders would decide to just let us all off the hook.) If people suddenly stopped all “discretionary” spending to pay off their credit cards, -- and stopped going out to dinner and the movies, skipped going to the nail salon, abandoned trips to the mall, and stopped shopping online for stuff we didn’t realize we had to have until we saw it pop up on the screen -- that would not be a good thing.

About two-thirds of the U.S. economy is based on consumer spending. So if we all squeezed our household budgets to payoff our debts, you would likely see a sharp decline in GDP and a huge spike in unemployment. Without all that spending, there would no need for millions of jobs – from the people who make the cardboard boxes to package all the stuff we buy to the people who work in the stores, restaurants and malls that make a living serving it up.

Even if we could all get to this “debt-free zone” unscathed, we’d still have to contend with an economy that was no longer lubricated by credit. Credit cards aren’t just convenient: they actually create spending power that is then used to buy goods and services. If you sucked all that spending power out of the system all at once, you’d risk creating a huge deflationary backdraft. Yes, people who still had jobs might have more to spend. But there would be much less spending power overall because many more people would be out of work.

Another way to fund this massive debt payback would be to tap the trillions in savings in stocks or appreciated home prices. But if credit card holders all tried to tap their paper profits at the same time, the stock and housing markets would be flooded with sellers, forcing prices to fall sharply. So that wouldn’t work either.

But assuming we all won some cosmic lottery at the same time, with some $2.2 trillion (and counting) of consumer debt outstanding in the U.S., any repayment in full would certainly send shockwaves through the financial services industry, especially if we all then vowed to remain debt free. Lenders can’t make money unless they lend. Watching those lenders come crawling back for more business might provide some short-term satisfaction to all of us borrowers – especially those of us chafing at ridiculously high credit cards rates and rapidly proliferating, completely unjustifiable “fees.” But an economy without a deep, reliable pool of credit wouldn’t get very far. As much as we all hate paying interest, we all need lenders even more.

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