revolutionized American spending habits and economic growth. From for sewing machines to and online lending, it reshaped how people buy goods and manage finances.
The evolution of consumer credit reflects broader economic shifts. It fueled industrial expansion, democratized access to goods, and created new financial institutions. However, it also raised concerns about debt levels, inequality, and economic stability.
Origins of consumer credit
Consumer credit emerged as a pivotal force in American economic development, reshaping consumer behavior and business practices
The evolution of consumer credit reflects broader shifts in American society, from agrarian to industrial to consumer-oriented economy
Early forms of installment plans
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Originated in the 19th century with furniture and sewing machine purchases
Allowed consumers to acquire expensive goods through regular payments over time
Singer Sewing Machine Company pioneered installment selling in the 1850s
Offered machines for 5downand3 monthly payments
Installment plans expanded to other durable goods (pianos, farm equipment)
Helped fuel the growth of manufacturing and retail sectors
Rise of department store credit
Department stores introduced charge accounts in the late 19th century
Enabled customers to make purchases and pay bills at the end of the month
Macy's and Marshall Field's were early adopters of store credit
Credit departments assessed customer
Store credit cards emerged in the 1920s
Allowed customers to carry balances and make minimum payments
Department store credit fostered customer loyalty and increased sales
Expansion in the 20th century
Consumer credit experienced rapid growth throughout the 20th century, paralleling the rise of mass consumption
Expansion of credit facilities played a crucial role in democratizing access to consumer goods
Impact of automobile financing
(GMAC) established in 1919
Provided loans directly to car buyers
Installment financing made automobiles accessible to middle-class consumers
By 1926, 75% of cars were purchased on credit
Auto financing stimulated the growth of the automobile industry
Increased production, employment, and related industries (roads, gas stations)
Created a model for financing other durable goods
Growth of credit cards
introduced the first charge card in 1950
Initially for restaurant expenses
Bank of America launched the (later Visa) in 1958
entered the market in 1958 with its charge card
(later MasterCard) formed in 1966
Credit cards revolutionized retail transactions and consumer spending habits
Offered convenience, security, and short-term credit
Rapid adoption led to a cashless payment system and expanded consumer purchasing power
Major consumer credit institutions
Various financial institutions emerged to meet the growing demand for consumer credit
Competition between different types of lenders shaped the consumer credit landscape
Banks vs finance companies
Commercial banks initially hesitated to enter consumer lending
Viewed as risky and beneath their traditional business model
Finance companies filled the gap in consumer credit market
(1912) and (1878) were pioneers
Banks gradually entered consumer lending in the 1920s and 1930s
Offered personal loans and later credit cards
Finance companies specialized in higher-risk, higher-interest loans
Focused on subprime borrowers and specific industries (auto loans)
Banks dominated credit card issuance and prime consumer lending
Regulatory differences impacted competition between banks and finance companies
Role of credit unions
emerged in the early 20th century as member-owned financial cooperatives
Focused on providing affordable credit to working-class and middle-class consumers
First U.S. credit union founded in 1909 in New Hampshire
Federal Credit Union Act of 1934 established federal regulation and chartering
Credit unions offered lower interest rates and more personalized service
Competed with banks and finance companies in consumer lending
Expanded services over time to include credit cards and mortgages
Non-profit status and member-ownership structure influenced lending practices
Often more lenient credit standards and focus on financial education
Government regulation
Government intervention in consumer credit markets increased throughout the 20th century
Regulations aimed to protect consumers and ensure fair lending practices
Truth in Lending Act
Passed in 1968 as part of the Consumer Credit Protection Act
Required lenders to disclose credit terms in a clear and uniform manner
Annual Percentage Rate (APR) and finance charges
Standardized the calculation of credit costs across different lenders
Gave consumers the right to cancel certain credit transactions within three days
Amendments expanded protections
(1974) addressed billing disputes
(1976) required disclosure of lease terms
Improved transparency in credit markets and consumer decision-making
Fair Credit Reporting Act
Enacted in 1970 to regulate the collection and use of consumer credit information
Established consumers' rights regarding their credit reports
Right to access credit reports
Right to dispute inaccurate information
Imposed obligations on credit reporting agencies
Ensure accuracy of information
Investigate consumer disputes
Limited the use of credit reports to permissible purposes
Set time limits for reporting negative information
Most negative information limited to 7 years
Amendments strengthened protections
Fair and Accurate Credit Transactions Act (2003) added identity theft provisions
Improved accuracy and fairness in credit reporting, impacting lending decisions
Economic impact
Consumer credit has had profound effects on the American economy, influencing both micro and macroeconomic trends
The availability of credit has shaped consumer behavior and overall economic growth
Consumer spending patterns
increased consumer purchasing power
Enabled acquisition of durable goods (cars, appliances) and services
Shifted consumption patterns from cash-based to credit-based purchases
Smoothed consumption over time
Allowed consumers to buy now and pay later
Increased demand for luxury and non-essential goods
Credit cards facilitated impulse purchases and online shopping
Led to changes in retail strategies and marketing approaches
Emphasis on financing options and credit-based promotions
Contributed to the growth of the service economy
Travel, entertainment, and hospitality sectors benefited from credit card use
Debt levels and household finances
Consumer debt as a percentage of disposable income rose significantly
From about 40% in 1960 to over 100% in the early 2000s
Increased financial leverage in household balance sheets
Higher debt-to-income and debt-to-asset ratios
Changed savings behavior
Decline in personal savings rates since the 1980s
Debt service payments became a significant portion of household expenses
Debt service ratio peaked at over 13% in 2007
Increased vulnerability to economic shocks and interest rate changes
Debt levels influenced wealth accumulation and retirement planning
Both positive (asset acquisition) and negative (interest costs) effects
Technological innovations
Technological advancements have revolutionized the consumer credit industry
Innovations have improved efficiency, accuracy, and accessibility of credit
Credit scoring systems
Fair, Isaac and Company (now FICO) introduced the first credit scoring system in 1956
FICO scores became industry standard, ranging from 300 to 850
Based on payment history, credit utilization, length of credit history, types of credit, and recent inquiries
Automated underwriting processes, reducing human bias in lending decisions
Enabled risk-based pricing of loans and credit products
introduced in 2006 as an alternative to FICO
Developed by the three major credit bureaus
Machine learning and AI enhanced credit scoring models
Incorporated alternative data sources (utility payments, rental history)
Credit scoring improved access to credit for some consumers
Also raised concerns about algorithmic bias and financial privacy
Online lending platforms
Peer-to-peer (P2P) lending platforms emerged in mid-2000s
Prosper (2005) and Lending Club (2006) were early pioneers
Connected individual borrowers with individual or institutional lenders
Utilized online applications and automated underwriting
Expanded to include marketplace lending and digital banks
SoFi, Avant, and Kabbage entered the market
Offered faster approval times and potentially lower interest rates
Introduced new credit assessment methods
Analyzing social media data and online behavior
Challenged traditional banking models and expanded credit access
Raised regulatory concerns about consumer protection and systemic risk
Accelerated the trend towards digital and mobile-first financial services
Social and cultural effects
Consumer credit has had far-reaching impacts on American society and culture
Changed perceptions of debt and financial management across generations
Changing attitudes toward debt
Shift from 19th century view of debt as moral failing to acceptance as financial tool
Post-World War II era saw normalization of consumer debt
"" mentality became prevalent
Credit cards transformed everyday transactions and spending habits
Blurred lines between needs and wants
Generational differences in debt perception emerged
Baby Boomers more debt-averse than Millennials and Gen Z
movements arose in response to growing consumer debt
Emphasized responsible credit use and personal finance education
Debt became intertwined with notions of the American Dream
Homeownership and higher education increasingly debt-financed
Cultural narratives around debt evolved in media and popular culture
From cautionary tales to aspirational lifestyle portrayals
Credit access and inequality
Expansion of credit increased financial inclusion for some groups
Women gained independent access to credit with of 1974
Persistent disparities in credit access along racial and socioeconomic lines
Redlining practices in mortgage lending
Higher interest rates and fees for subprime borrowers
Credit scores became de facto economic passports
Impacting employment, housing, and insurance opportunities
Debate over the role of credit in perpetuating or alleviating poverty
Predatory lending practices vs. credit as a tool for economic mobility
Alternative financial services (payday loans, check cashing) filled gaps
Often at high cost to underserved communities
Financial technology (fintech) promised to democratize credit access
Raised questions about algorithmic bias and data privacy
Policy debates on balancing credit availability with consumer protection
Community Reinvestment Act and its ongoing revisions
Consumer credit in recessions
Economic downturns have significant impacts on consumer credit markets
Recessions often lead to tightening credit conditions and increased defaults
Subprime lending crisis
Expansion of subprime mortgage lending in early 2000s
Fueled by low interest rates and lax underwriting standards
Securitization of mortgages spread risk throughout financial system
Housing bubble burst in 2006-2007
Widespread defaults on subprime mortgages
Triggered global financial crisis in 2008
Lehman Brothers collapse and credit market freeze
Consumer credit contracted sharply
Banks tightened lending standards
Credit card limits reduced and accounts closed
Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010
Created Consumer Financial Protection Bureau (CFPB)
Long-term impacts on consumer credit behavior and regulation
Increased scrutiny of lending practices
Consumer wariness of excessive debt
COVID-19 pandemic impact
Sudden economic shutdown in 2020 led to widespread job losses
Government intervention to support consumer credit markets
provided mortgage forbearance and suspended student loan payments
offered payment deferrals and fee waivers
Decline in consumer spending and borrowing during lockdowns
Credit card balances decreased initially
Divergent impacts across income levels
Higher-income households increased savings
Lower-income households relied more on credit to cover expenses
Mortgage refinancing boom due to low interest rates
Surge in demand for online and contactless payment methods
Accelerated shift towards digital lending platforms
Long-term effects on credit scoring and underwriting practices
Consideration of pandemic-related financial hardships
Future trends
The consumer credit landscape continues to evolve with technological and societal changes
New models and innovations are reshaping how credit is accessed and used
Alternative credit models
Use of non-traditional data in credit decisioning
Rent payments, utility bills, and telecom data
Expansion of "buy now, pay later" (BNPL) services
Affirm, Klarna, and Afterpay offering point-of-sale financing
Subscription-based credit models
Combining credit lines with budgeting tools and financial education
Blockchain and cryptocurrency-based lending platforms
Decentralized finance (DeFi) offering new forms of collateralized lending
Income share agreements (ISAs) for education financing
Repayments based on future earnings rather than fixed interest rates
Artificial intelligence in credit underwriting
Machine learning models for more accurate risk assessment
Open banking initiatives facilitating data sharing
Potential for more holistic financial profiles and personalized credit offers
Fintech and consumer credit
Mobile-first lending platforms continue to gain market share
Streamlined application processes and instant decisions
Integration of financial services into non-financial apps and platforms
Embedded finance and Banking-as-a-Service (BaaS) models
Increased use of chatbots and virtual assistants in credit servicing
AI-powered customer support and financial advice
Biometric authentication for credit applications and transactions
Enhancing security and reducing fraud
Personalized credit products based on real-time data analysis
Dynamic interest rates and credit limits
Expansion of peer-to-peer and crowdfunding platforms
Blurring lines between consumer and small business lending
Regulatory challenges and opportunities in fintech lending
Balancing innovation with consumer protection
Potential for central bank digital currencies (CBDCs) to impact credit markets
Changing the role of traditional financial intermediaries
Key Terms to Review (34)
American Express: American Express is a multinational financial services corporation known primarily for its credit card, charge card, and traveler's cheque businesses. It plays a significant role in consumer credit by providing individuals with the ability to make purchases on credit, which can be paid off in full or over time, thus influencing spending behaviors and financial management.
Bankamericard: BankAmericard was a credit card program introduced by Bank of America in 1958, which later evolved into what we know today as Visa. This card revolutionized consumer credit by allowing users to make purchases on credit at various merchants, changing the way people approached spending and payments.
Buy now, pay later: Buy now, pay later is a payment option that allows consumers to make a purchase immediately and defer the payment to a later date, often through installment plans. This method is becoming increasingly popular as it provides consumers with the flexibility to buy products without the immediate financial burden, facilitating easier access to credit and promoting consumer spending.
CARES Act: The CARES Act, or Coronavirus Aid, Relief, and Economic Security Act, is a significant piece of legislation enacted in March 2020 to provide economic relief in response to the COVID-19 pandemic. This act aimed to support individuals, businesses, and healthcare providers by offering financial assistance through various measures such as direct payments to citizens, expanded unemployment benefits, and loans for small businesses. By addressing consumer credit concerns, it sought to stabilize the economy during an unprecedented crisis.
Charles E. Merriam: Charles E. Merriam was an influential American political scientist and public administration expert, known for his work on the role of government in the economy and his advocacy for consumer credit reform. His ideas contributed significantly to shaping modern public policy, particularly in understanding the relationship between consumer behavior and economic systems. Merriam's emphasis on the importance of data and empirical research laid the groundwork for future studies in consumer credit and its impact on society.
Consumer Credit: Consumer credit refers to the ability of individuals to borrow money or access goods and services with the promise to repay later, typically through installment payments or revolving credit. It plays a crucial role in enabling consumers to make significant purchases, such as homes, cars, and appliances, by spreading the cost over time. This financial tool has transformed consumer behavior, encouraging spending and facilitating economic growth.
Consumer Leasing Act: The Consumer Leasing Act is a federal law enacted in 1976 that regulates consumer leases, requiring lessors to provide clear and detailed disclosures about the terms of a lease agreement. This act aims to ensure that consumers have all necessary information to make informed decisions when leasing goods such as cars or appliances. By enhancing transparency, it helps protect consumers from deceptive practices and promotes fair competition among lessors.
Consumerism: Consumerism refers to the cultural and economic ideology that encourages the acquisition of goods and services in ever-increasing amounts. It emphasizes the importance of personal choice, material wealth, and the role of consumers in driving economic growth. This concept is crucial for understanding various aspects of retail innovation, the development of large department stores, and the expansion of consumer credit in modern economies.
Credit availability: Credit availability refers to the ease with which individuals and businesses can obtain loans or credit from financial institutions. This concept is closely linked to interest rates, lending standards, and economic conditions, influencing spending and investment decisions across various sectors. Understanding credit availability helps illustrate the dynamics between banks, borrowers, and the overall economy, as it directly impacts consumer behavior and business growth.
Credit card companies: Credit card companies are financial institutions that issue credit cards to consumers, allowing them to borrow money to make purchases with the promise to pay it back later, usually with interest. These companies play a significant role in consumer finance, facilitating immediate access to funds and enabling a culture of consumer credit that impacts spending behavior. By providing a platform for electronic transactions, credit card companies have also been essential in the rise of online shopping.
Credit cards: Credit cards are financial tools that allow consumers to borrow money up to a certain limit to make purchases or pay for services, with the expectation that the borrowed amount will be repaid, typically with interest. They have revolutionized consumer spending by offering convenience and immediate access to funds while also influencing consumer credit behavior and financial responsibility.
Credit score: A credit score is a numerical representation of a person's creditworthiness, based on their credit history and other financial behaviors. It helps lenders assess the risk of lending money or extending credit to an individual. Higher scores typically indicate better creditworthiness, which can lead to lower interest rates and better loan terms.
Credit Unions: Credit unions are member-owned financial cooperatives that provide a wide range of banking services, including savings accounts, loans, and credit. They operate on the principle of serving their members rather than maximizing profits, often offering lower fees and better interest rates than traditional banks. By pooling resources, credit unions empower their members to access affordable financial products, promoting financial stability and community development.
Creditworthiness: Creditworthiness is the assessment of an individual's or entity's ability to repay borrowed money, often evaluated through their credit history, financial stability, and overall financial behavior. It plays a crucial role in determining whether a lender will extend credit and on what terms, including interest rates and repayment schedules. The evaluation of creditworthiness helps lenders make informed decisions and manage risk in lending practices.
Debt accumulation: Debt accumulation refers to the process of incurring debt over time, often due to the continuous borrowing of money to finance expenses. This can occur through various means such as credit cards, loans, and mortgages, leading to a growing total amount owed. As consumers increasingly rely on credit for purchases, debt accumulation becomes a significant concern, particularly when it surpasses their ability to repay, potentially resulting in financial distress or bankruptcy.
Diners Club: Diners Club is a charge card company founded in 1950 that pioneered the concept of a credit card by allowing customers to make purchases at various establishments and pay for them later. This innovation greatly impacted consumer behavior, enabling individuals to dine and shop without immediate cash, which was a significant shift in how transactions were conducted in the mid-20th century. As a result, Diners Club played a crucial role in the expansion of consumer credit in America.
Equal Credit Opportunity Act: The Equal Credit Opportunity Act (ECOA) is a federal law enacted in 1974 that prohibits discrimination in lending based on race, color, religion, national origin, sex, marital status, or age. This act ensures that all consumers have an equal chance to receive credit and access financial services, contributing to fair lending practices within the consumer credit market.
Fair Credit Billing Act: The Fair Credit Billing Act (FCBA) is a federal law that protects consumers from unfair billing practices and provides a mechanism for disputing charges on credit card accounts. It ensures that consumers can challenge incorrect or unauthorized charges and sets specific procedures for resolving these disputes, making it a crucial element in the realm of consumer credit. The act enhances consumer rights in managing their credit accounts and promotes transparency in billing practices.
Fair Credit Reporting Act: The Fair Credit Reporting Act (FCRA) is a federal law enacted in 1970 to promote accuracy and privacy of information in the files of consumer reporting agencies. It regulates how credit information is collected, accessed, and shared, ensuring consumers can understand and control their credit reports. This act is essential for protecting consumers in the realm of consumer credit, giving them rights regarding their credit information and holding credit reporting agencies accountable for the accuracy of the data they report.
Financial literacy: Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. It empowers individuals to make informed decisions regarding credit, savings, and expenditures, which are essential for achieving financial stability and success. This skill set is especially crucial in navigating consumer credit, enabling individuals to manage debt responsibly and avoid financial pitfalls.
General Motors Acceptance Corporation: General Motors Acceptance Corporation (GMAC) was established in 1919 as a financial services arm of General Motors, primarily to provide vehicle financing and insurance services. It played a crucial role in promoting consumer credit by making it easier for individuals to purchase automobiles through installment loans and leases, thereby boosting car sales and expanding automobile ownership in America.
Great Depression: The Great Depression was a severe worldwide economic downturn that began in 1929 and lasted through the late 1930s, marked by widespread unemployment, significant declines in industrial production, and deflation. This period dramatically reshaped American society and led to major changes in government policies and labor movements.
Household Finance Corporation: The Household Finance Corporation (HFC) was a financial institution that specialized in providing consumer loans and credit services primarily to individuals and families. It played a significant role in the development of consumer credit in the mid-20th century, offering various financial products such as personal loans, home improvement loans, and debt consolidation loans. By targeting consumers with limited access to traditional banking services, HFC helped shape the landscape of household finance and credit availability.
Installment loans: Installment loans are a type of borrowing where the borrower agrees to repay a set amount of money in fixed payments, or installments, over a specified period of time. These loans typically come with a fixed interest rate and are used for various purposes, including purchasing big-ticket items or consolidating debt. The predictable nature of repayment makes installment loans a popular choice for consumers seeking financial stability.
Installment plans: Installment plans are financial arrangements that allow consumers to purchase goods or services by paying for them over a set period through regular, scheduled payments. This method of payment enables individuals to acquire items they may not be able to afford upfront, thus making larger purchases more accessible. These plans often come with interest rates, which can vary based on the lender, and are a significant part of consumer credit systems.
Interbank Card Association: An interbank card association is an organization that facilitates electronic payments between banks and other financial institutions, primarily through credit and debit card transactions. These associations set rules, standards, and fees for transactions, enabling secure and efficient processing of card payments. This concept is critical in the landscape of consumer credit as it supports the use of cards as a means of borrowing and spending, providing consumers with access to credit facilities.
John Maynard Keynes: John Maynard Keynes was a British economist whose ideas fundamentally changed the theory and practice of macroeconomics, particularly through his advocacy for active government intervention in the economy. His work highlighted the importance of fiscal policies to manage economic fluctuations and promote full employment, making him a key figure in discussions about economic recovery strategies during downturns.
Materialism: Materialism is the tendency to prioritize material possessions and physical comfort over spiritual or intellectual values. This mindset often drives consumer behavior, as individuals seek to acquire goods and services that enhance their quality of life, leading to a culture where consumption is equated with happiness and success. As consumer credit becomes more accessible and mass media promotes desires for new products, materialism becomes a defining feature of modern society.
Peer-to-peer lending platforms: Peer-to-peer lending platforms are online services that connect borrowers directly with individual lenders, bypassing traditional financial institutions. This method allows individuals to obtain loans at potentially lower interest rates while providing investors with the opportunity to earn returns on their capital. These platforms have transformed the lending landscape by leveraging technology to facilitate personal loans, often using algorithms to assess creditworthiness and risk.
Personal finance company: A personal finance company is a financial institution that provides a range of credit and loan products specifically aimed at consumers. These companies focus on offering personal loans, installment loans, and other forms of consumer financing to individuals who may not have access to traditional banking services or who need quick access to funds. They play a significant role in the consumer credit landscape by catering to various financial needs, often targeting borrowers with limited credit histories or those seeking to consolidate existing debt.
Post-wwii economic boom: The post-World War II economic boom refers to the rapid economic growth and prosperity experienced in the United States and many other Western countries from the late 1940s through the early 1970s. This period was marked by increased consumer spending, industrial expansion, and significant advancements in technology, which were largely fueled by returning soldiers, government investment, and the expansion of consumer credit.
Revolving credit: Revolving credit is a type of credit arrangement that allows consumers to borrow money up to a specified limit repeatedly, without needing to reapply for a loan each time. This form of credit is most commonly associated with credit cards, where users can carry a balance from month to month and make partial payments while still having access to the available credit. It provides flexibility for consumers, as they can manage their borrowing based on their individual financial needs.
Truth in Lending Act: The Truth in Lending Act (TILA) is a federal law enacted in 1968 that aims to promote informed use of consumer credit by requiring disclosures about its terms and cost. This legislation seeks to ensure that consumers are aware of the costs associated with borrowing, including interest rates, fees, and other charges, thus enhancing transparency in credit transactions. TILA helps to protect consumers from misleading practices and allows them to make better-informed decisions when obtaining credit.
VantageScore: VantageScore is a credit scoring model developed by the three major credit bureaus—Equifax, Experian, and TransUnion—that evaluates a consumer's creditworthiness. This scoring system utilizes a range from 300 to 850, similar to FICO scores, and incorporates various data points from consumer credit reports to generate a score that lenders use to make decisions on extending credit. VantageScore emphasizes the importance of timely payments, credit utilization, and overall credit history in determining an individual's score.