How Credit Cards and Debit Cards fit into the monetary system??
Many people use credit or debit cards to make purchases. Because money is the medium of exchange, one might naturally wonder how these cards fit into the measurement and analysis of money.
Let’s start with credit cards. Although one might guess that credit cards are part of economy’s stock of money, in fact measures of quantity of money do not take credit cards into account. Credit cards are not really a method of payment but a method of deferring payment. When you buy an item with credit card, the bank that issued the card pays the store what is due. Later, you will have to repay the bank. When the time comes to pay your credit card bill, you will likely do so by writing a cheque against your account. The balance in this account is part of economy’s stock of money.
The story is different with debit cards, which automatically withdraw funds from a bank account to pay for items brought. Rather than allowing users to postpone payment for their purchases, a debit card allows users immediate access to deposits in their bank accounts. Using a debit card is similar to writing a cheque. The account balances that lie behind debit cards are included in measures of the quantity of money.
Even though credit cards are not a form of money, they are still important for analyzing the monetary system. Because people with credit cards can pay many of their bills all at once at the end of the month, rather than sporadically as they make purchases, they may hold less money on average than people without credit cards. Thus, the increased popularity of credit cards may reduce the amount of money that people choose to hold. In other words, credit cards are not part of the supply of money, but they may affect the demand for money.