Question

Since credit cards can be used to make payments, why are they not treated as money?

Short answer

Credit cards are not treated as money because they do not represent an asset or store of value; they are a tool for accessing credit.

Step-by-step solution

Understanding Money

To determine why credit cards are not considered money, we first need to understand what constitutes money. Money functions as a medium of exchange, a unit of account, and a store of value.

Credit Cards as Payment Instruments

Credit cards facilitate transactions and allow consumers to make purchases without immediate cash exchange. They provide a means to defer payment and are used extensively for convenience and additional benefits.

Credit Cards and Money Criteria Comparison

Credit cards do not directly fulfill the core roles of money. They do not serve as a unit of account or a store of value. They are essentially a means of accessing borrowed funds rather than representing an asset or value in themselves.

Conclusion Regarding Credit as Money

Since credit cards do not represent actual money, but instead provide access to credit, they do not satisfy the main functions of money (medium of exchange, unit of account, store of value) and are thus not categorized as money.

Key concepts

Medium of Exchange

Imagine you need to buy a book. Money simplifies this process because it acts as a medium of exchange. Being a medium means it is something commonly accepted in trade for goods and services. Without money, trade would require bartering, which involves a direct exchange of goods or services without any agreed measure of value.

The ease of using money lies in its universal acceptance. Everyone knows how much things cost in terms of money, and sellers widely accept it in exchange for their items.

• It reduces the time and effort needed to find someone who wants what you have and has what you want.
• Money eliminates the double coincidence of wants problem that arises in a barter system.

Credit cards, on the other hand, serve as a promise of payment rather than a direct exchange medium. They facilitate transactions, but aren't money since they don't fulfill the basic role of immediate exchange without conditions.

Unit of Account

A unit of account is a function of money that provides a standard metric for measuring the value of goods and services. This concept allows people to compare the value of products by using money as a common denominator. Knowing the price of an apple in dollars helps you decide if it's worth buying compared to its other uses.

By allowing everything to be priced in the same units, it makes it very easy to analyze value and make decisions about expenditures and savings.

• It helps in budgeting and financial planning.
• Provides clarity in transactions and contracts due to standardized pricing.

Credit cards don’t qualify as a unit of account since they don't offer a measurement of value themselves. They are simply a tool for accessing funds that have been measured, traditionally in monetary units.

Store of Value

Storing value refers to the preservation of purchasing power over time. Money must hold its value well and not deprecate quickly so that individuals can save it for future use. A reliable store of value ensures that a person can save now and use that money to purchase goods or services later with similar purchasing power.

• This characteristic secures financial stability and future planning.
• It enables individuals to save for large future purchases like a house or college tuition.

Credit cards do not function as a store of value because they are a form of debt. Through credit cards, you are accessing borrowed money that must be repaid with interest. As such, they cannot preserve purchasing power for the future since their use is contingent on future repayment rather than current stored value.