The Rise of Consumer Credit

We frequently hear complaints about the unstoppable deluge of unsolicited credit card offers flooding our mailboxes. Even more frequently, we hear complaints about unexpected credit-card fees piling up on top of snowballing credit-card balances, even as the industry now operates under new, consumer-friendlier rules thanks to the CARD Act of 2009.

On June 15, the Federal Reesrve tweaked those rules yet again, capping late fees at $25 in most situations, banning inactivity fees and requiring issuers to reassess all rate increases made after January 1, 2009.

Such changes affect millions of consumers. There were over 575 million cards in circulation by the end of 2009, according to the Nilson Report, and according to a Federal Reserve Bank of Boston survey, the average cardholder has 3.5 different cards. The total revolving debt in America (of which 98% is credit card debt) stands at $852.6 billion as of March 2010.

Yet, consumer credit was not always so prevalent. As recently as the 1970’s and 1980’s, credit cards were considered something of a luxury. They were not easy to get, and thus relatively few Americans had them. Below, we’ll discuss the rise of consumer credit – and where we are today.

The Early Days of Credit

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Consumer credit has been available since the 1920’s, when gas stations and general stores extended informal credit to their trusted, regular customers. Back then, people were able to borrow through so-called “charge cards.” Transactions involved only the merchant and its customers, without any intermediaries. By 1938, merchants began accepting each other’s charge cards. Bank-issued credit cards first surfaced in 1946, when John Biggins of Brooklyn’s Flatbush National Bank invented the “Charge-It” program. Via this program, merchants could deposit their sales slips with the bank, which then billed customers on behalf of the merchants.

According to Time Magazine, though, it was not until the 1950’s that credit cards as we know them today began to thrive. The first real credit card was the Diners Club card.

The first one, issued in 1950, was made of cardboard and limited to use at 27 participating restaurants in New York City. The concept quickly caught on due to the convenience and novelty of paying with an exclusive card, and by 1952, roughly 20,000 Americans were Diners Club cardholders.

American Express made the leap from traveler’s checks to credit cards in 1958, and Bank of America entered the fray soon after by mailing 60,000 BankAmericards to California residents. They were initially promoted among traveling salesmen (a fixture of that time) for easy transactions on the road.

Growing Popularity

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Credit cards became more widespread in the 1970’s and 1980’s. Once companies like Visa and MasterCard rose to prominence, outside service providers stepped in to streamline transactions. With the aid of these providers, both Visa and MasterCard became vastly more efficient. Standardized rules and procedures were developed for handling bank paperwork, reducing fraud and identifying card misuse. In turn, it became cheaper for banks to issue Visa and MasterCard products to their customers, and for those customers to pay merchants.

With processing streamlined and costs contained, the credit industry was poised for a major expansion. Bank of America’s initial mass-mailing set the tone for what would become a trend in the credit card business, and heavy promotion continued to consumers believed to be low credit default risks.

The growth in credit card popularity during the 70’s and 80’s pales in comparison to today’s situation. It was not until 1987, for instance, that American Express issued a card allowing balances to revolve month to month. Discover Card, too, waited until the 1986 Super Bowl to lift the curtain on its first credit card.

The 1990’s Explosion

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The explosion of credit card use began in the 1990’s. In a 2004 examination of America’s growing credit card debt, the New York Times found the number of people holding charge cards had increased 75% between 1990 and 2003, from 82 million to 144 million. During the same period, total credit-card charges grew even more: roughly 350%, from $338 billion to a staggering $1.5 trillion. Moreover, monthly revolving balances have steadily climbed since 1990. Back then, households that carried a balance on their credit cards carried an average of $2,550 month to month. By the end of 2003, that average had nearly doubled to $7,520.

Nor was credit card debt the only type of consumer debt to rise during the 1990’s. Mortgages, auto loans and student debt all continued to accumulate during the same period. The rise in credit card and other debt dovetailed, while the savings rate dwindled.

The situation is similar in the United Kingdom, where, the BBC finds, credit card debt has more than tripled since 1994. As a result of easier credit card access, British consumers and their credit cards “gobbled up the latest TVs and the furthest holidays” en route to hefty debt totals.

Where We Stand Today

Though America’s total consumer debt has undoubtedly risen, it is not as widely dispersed as you might think. Liz Pulliam Weston of MSN puts some of the frightening numbers into context. We frequently hear, for instance, that the average American carries $8,000 in credit card debt. In reality, Weston shows, “averages don’t tell the tale.” The $8,000 figure is derived from a 2002 study in which CardWeb divided the outstanding credit card debt at the end of that year ($750.9 billion) by 84 million – the number of American households said to have at least one credit card. Deeper analysis of the same data showed that 55% of the households owe nothing on credit cards at all. Which means that the rest 45% owe more than $8,000 — a lot more.

How much more? Bill Whit at the Washington research firm VIP Forum discovered that:

• Only 29% of households owe $1,000 or more on their cards.
• 21% owe $2,000 or more.
• 6% owe $8,000 or more.
• 4% owe $10,500 or more.
• 1% owe $21,400 or more.