Most people struggling with credit card and other types of debt agree that eliminating that debt would make their life easier. And most personal finance gurus advocate debt elimination as an important step toward financial security and freedom.

But collectively, if the whole country simultaneously starts to pay off debt or simply spend less money, the actions that are helpful for individuals can prove disastrous for the larger economy. In fact, part of the nation’s current economic turmoil can be blamed on increasing frugality at the individual level.

How Ditching Credit Might Hurt the Economy

Here’s a look at exactly how much of our credit we’ve sloughed off in recent months:

• The New York Federal Reserve published numbers showing that in the last 12 months, Americans canceled 199 million credit cards and only opened 168 million new ones.
• Since the end of 2008 (the middle of the recession), the average balance on an American credit card has decreased by 20 percent.

On an individual level, this is great: more Americans are cutting back on credit use, paying down the credit card debt they have, and generally acting in a more financially responsible way. But collectively, the same actions have proven harmful.

Because about 70 percent of the nation’s gross domestic product (GDP) is composed of consumer spending, our nation’s GDP naturally contracts when spending shrinks. When the GDP is smaller, everyone makes less money, including people who usually provide jobs.

Increased unemployment, of course, tends to make people even more frugal, which leads to paying down debts and saving money. This, paradoxically, tightens the overall economy even more.

But Wait, There’s More…

This is a frustrating concept in many ways, but our current debt situation gets even trickier when you consider debts from sources other than credit cards. Despite the recession, it seems student and auto loans have continued to do fairly well.

But just because people are taking on new loans doesn’t mean those loans are getting paid. Consider this:

• Since 2008, the delinquency rate on credit card debt has increased from 10.2 percent to 12.2 percent.
• Student loans went delinquent at a rate of 9.3 percent in 2008; today, 11.2 percent of them are past due.
• Car loans had a 3.9 percent delinquency rate in 2008 and now have a 5.0 percent rate.

So even when we’re borrowing, we’re not necessarily paying that money back very well. And while some debts are dischargeable in Chapter 7 bankruptcy, student loans are not among those.

Bottom line: debt collectors are not likely to listen to the argument that you’re helping the economy by taking on more debt. Working to pay off credit card debt still makes sense on an individual level, and the whole science of economics is built on assuming individuals act according to what makes the most sense for them.