Since the Covid-19 pandemic, many consumers have relied on debt to get by. As of June 2020, American consumers owe $4.12 trillion in consumer debt. The average 24-year-old, a member of Gen Z, owes $2,000 on their credit card, and millennials have an average of $27,900 in consumer debt (most of that being credit card debt).
It wasn’t that long ago that getting access to that much credit was impossible. In fact, it wasn’t until 1974 that a woman could get a credit card by herself – without her husband cosigning.
Here’s what you should know about the history of credit – and how that affects you today.
The beginning of credit
One of the first instances of credit was in Mesopotamia in 2000 BC when people would borrow seeds that would be repaid at harvest or animals that would be repaid when they gave birth.
The Code of Hammurabi, one of the earliest recorded legal systems, also set a price on how much interest could be charged when lending silver. This is one of the first instances of a government standardizing the interest rate on a loan. The interest rate limits were relatively high, up to 33.3% for grain and 20% for silver.
Lending declined in the Dark Ages, but was revived with the age of New World explorers. England was the first country to enact an interest rate limit of 10%.
The evolution of credit
Consumer lending grew as companies realized that more people would buy their products if they could pay for them a little bit at a time.
In 1932, General Electric (GE) created a program so customers could take out loans for refrigerators. This was a response to the Great Depression when people were buying fewer refrigerators. By creating appliance loans, they were making these products more accessible to the general public. Now, a regular person could afford to buy a refrigerator without saving up for months or years in advance.
The auto manufacturer General Motors (GM) was the first company to start offering auto loans to new drivers. Customers who wanted to buy a car could put down a 35% down payment and become the owner of a new vehicle.
This change by GM helped spur other companies to start offering loans to consumers for other major purchases. Auto loans became extremely prevalent around this time.
The increase of student loans
In the 1840s, Harvard University became one of the first colleges to offer student loans to its students, though it wasn’t until 1965 that federal student loans were created. These were subsidized student loans and represented a huge change in higher education.
But these were still limited to students below a certain income threshold. In 1978, the Middle Income Student Assistance Act allowed students from families from any income level to qualify for student loans.
Then in 1980, Parent PLUS loans were created so parents could borrow money to help pay for their children’s education. Shortly after, graduate students could start taking out student loans for their education. In 1992, the limits on PLUS loans were relaxed which also increased lending.
Unfortunately, colleges started increasing the cost of college which has also led to the dramatic rise of student loans. According to the Consumer Financial Protection Bureau, private lenders began to multiply in the early 2000s, without outstanding loans rising from “$5 billion in 2001 to over $20 billion in 2008, before contracting to less than $6 billion in 2011.”
The rise of credit cards and mortgages
The federal government expanded mortgages under the Federal Housing Administration, Federal National Mortgage Association and other agencies. They minimized balloon payments, which had previously been a standard part of American mortgages.
Before the 1930s, the average mortgage had either a five or 10-year period. Instead, the Home Owners’ Loan Corporation (HOLC) created the 15-year mortgage with a set interest rate and monthly payments.
In the 1950s, the Diners Club was invented. It’s one of the first modern examples of charge cards, first designed to expand credit at restaurants beyond the early use of personal ‘house accounts.’ After some time, cardholders could use their Diners Club to pay for hotels and rental cars. Diners Club was a charge card, which means you had to repay the balance in full every month. In 1958, the first American Express charge card was created.
Also in 1958, the BankAmericard was created and was the first credit card that customers could use at more than one kind of retailer. Before that time, you were only allowed to use a card at one store or one type of business.
The card also let customers pay off the balance over time instead of all at once. This is what separates credit cards from charge cards. At first, you could only use a credit card in your local area, but soon they expanded to include other regions. Eventually you could use a credit card across the country.
Use credit responsibly
Even though credit isn’t a new concept, both the number of ways you can use credit and the amount of credit Americans use have exploded in the last 100 years. Remember, credit wasn’t invented to help the consumer – it was invented to help companies to sell more.
Taking out a loan or paying for something on credit is incredibly easy nowadays – which means the temptation is greater. Buyers need to be more vigilant about using credit to finance a purchase, especially when it’s a discretionary or non-essential item.
Before you swipe a credit card, borrow money for a car, or take out a mortgage, consider how much you’re actually borrowing. Calculate the total interest paid and consider borrowing less than you originally counted.
Think about what you’ll get in return. Most people agree that taking out loans for college is usually worth it, but can you go to a public university instead of a private one? Most people need a car to get around, but can you buy a pre-owned vehicle instead of a new one? The less you borrow, the more you’ll have for other priorities.
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