History of Consumer Credit
It’s interesting to note that the methods of consumer credit so many of us are familiar with today have only existed for a very short time. Historically, consumer credit cards, equity lines of credit and consumer loans are fairly modern financial inventions. And as such tools have become more widespread, consumer debt has increased exponentially.
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The Early Days: Store Credit
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Many of the early financiers for the average consumer were storekeepers, not banks or credit card companies. Particularly in the U.S. in small towns and railroad stops, general stores managed a mix of selling, barter and store credit for local consumers. This relationship occurred out of necessity; farmers and merchants depended on each other to survive literally. General store managers knew if farmers couldn’t plant seed and farm, they wouldn’t be around later to provide food supply to stores or to buy more product after harvest profits. So store credit was a logical solution.
Granted, much of general store consumer credit deal-making was based on handshakes, but the threat of exile in a small town was the enforcement hammer. An outcast could literally starve without the town’s help.
19th Century Morals
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Borrowing in the 19th century was not something someone did for convenience. In fact using borrowed money for non-essentials was treated as shocking, sinful and ungodly. Most people were brought up to understand only hard work was the way to pay for anything. Banks only worked with businesses and rich families, so the average farmer still continued to rely on store credit and family for help.
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The 20th Century: Trying Out Luxury
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The 1929 stock market crash changed the financial landscape permanently. Where most families worked to save to eventually buy a home, a new concept began in the 1930s. The initial concept of the mortgage was created, beginning installment payment loans over 30 year periods and allowing folks to spread out the cost of homes earlier in life.
The Diner's Card
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The earliest charge card came in the 1949 with the introduction of the Diner’s Card. It wasn’t a credit card; instead it represented a relationship between a bank and select restaurants to process payments, and then charge the card holder later through the bank. While this approach was the catalyst for credit cards, the idea was limited by a lack of technology to quickly process payments. It was also limited by distance since restaurants only wanted to deal with banks in their nearby proximity, not from far away.
The First Bank Charge Card
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The first bank charge card was created in 1951 with the same approach as the Diner’s Card. However, it was allowed to be used with different kinds of merchants rather than just restaurants. Within a few years two mainstays were created: Visa and MasterCard.
Modern Amenities
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By the 1970s, consumer credit via loans and cards was widely available, but banks and lenders were very careful about who was approved. Home loans became established as the way to buy a home for most people, and car loan financing was widespread as well. However, applicants were screened carefully both for proof of income and community standing.
Much of the conservative approach changed by the 1980s, particularly as banking rules were loosened to allow financial institutions to work in more than one financial industry category (i.e. banks only did banking, thrifts only did home lending, stock brokerages only did stocks, etc.). Twenty years later, consumer credit became so available, credit cards were being pitched to college students who clearly had no income to pay their bills.
Some of the lax approach has been scaled back due to the 2008 Recession, which may not be a bad thing given how much debt Americans have today.
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- Photo Credit three credit cards image by Aleksandr Ugorenkov from Fotolia.com
