Paying by card makes spending hurt less, and debt grows easier
Hand over banknotes and you feel the loss; tap a credit card and you barely notice. Economists call this the pain of paying, and the further a payment gets from cash, the weaker that sting becomes. It helps explain why people spend more, and borrow more, when plastic replaces paper money.
Debt is simply an obligation for a debtor to repay a creditor, whether the borrower is a person, a company, a city or a whole country. The English word appeared in the late 13th century, arriving through Old French from the Latin debere, to owe. It also stretches to moral obligations, as in owing someone a debt of gratitude. The original sum lent is the principal, and a loan may be repaid all at once at the end, in steady instalments, or partly in instalments with a large final balloon payment.
For households, borrowing means spending future income before earning it. Mortgages, car loans and credit card balances let people in industrialised countries buy homes and cars too expensive to pay for outright. Many people, especially the poor, lack affordable credit and borrow informally from friends or relatives, which can strain relationships when repayment falters. When borrowers default, a lender holding collateral such as a house or car may repossess it, and severe cases end in bankruptcy.
Companies borrow through plain term loans, bonds with fixed lifetimes, and syndicated loans, where a group of lenders shares a sum too large for any single one to risk. Borrowing magnifies the return on shareholders' money, but the ratio of debt to equity is a key measure of how risky a firm is. Revenue-based financing asks a business to repay 1.5 to 2.5 times what it borrowed over several years, on a flexible schedule.
Governments borrow for day-to-day spending and big projects. United States Treasury debt serves as the benchmark against which other debt is priced, thanks to its deep, open market. National debt is usually compared with the size of the economy as a debt-to-GDP ratio, and a United Nations development target for 2030 aims to ease the external debts of heavily indebted poor countries.
Source: Debt
