Credit is one of the most important aspects of economic growth because it multiplies that growth with the addition of extra money from lenders. As an example: if you have $10,000 to spend on an investment, but you have the ability to receive a loan of additional $5,000, the extra cash increase the value of your investment by 50%. And as long as the extra investment yields a higher rate then the cost of the loan, your return is higher than if you did not use the loan, adding to bigger and faster economic growth.
This is why the increase in debt of an economy ultimately leads to a higher GDP which in turn leads to further productivity growth.
When there is a continuous expansion of credit, there is an upward prosperity. This is the case because when there is an increase in investment and consumption; more jobs are created for the people, and income and profits increase too.
Also, the price of assets increase, and this includes property and stocks which boost the net worth of people. Eventually, the owners of these assets acquire more wealth which can be used as collateral. This increase in collateral will lead to the ability to borrow more and keep investing more, and the cycle continues.
Credit scores and credit history gives the credit market a balance system to not allow it to get out of control with rising defaults. But there are other risks associated with a credit driven market. Such as formation of bubbles: when credit is in excess, there is the risk of assets overvalued, which leads to a collapse. This could lead to social chaos.
Also, an increase in national debt could cause a major default if there is an unforeseen economic disaster, running the country and its citizens to bankruptcy.
If you are in the market for a loan, it is important to understand the benefits just as much as the risk so you do not go about it with an anxious mind set that credit is bad. In many ways, a loan will allow you to attain what you want as long you are focused and aware to manage the money.
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