The following post is by MPFJ staff writer, Laurie Blank. Laurie is a wife, mother to 4 and homesteader who blogs about personal finance, self-sufficiency and life in general over at The Frugal Farmer. Part witty, part introspective and part silly, her goal in blogging is to help others find their way to financial freedom and to a simpler, more peaceful life.
Although the idea of credit in some form has been around for centuries, never has America been in such a state concerning credit and debt as it has been these last ten years or so.
During pioneer days, credit would be given out by individual stores based on the debtor’s relationship with the proprietor and their history of repayment.
This type of debt was accrued most often by farmers who received most of their year’s income in a lump sum at harvest time. Farmers would “buy” things on credit with the local merchants in the nearest town, promising to pay the balance in full at harvest time.
Defaults were rare, as most merchants had a strict rule that any default on debt owed meant no credit would be extended again. As such, people worked hard to pay their credit balances due, no matter what they had to sacrifice to do it.
As farming jobs decreased with the industrial age, store credit at local merchants was offered to more people, but the rules were still the same: pay your bill in full or lose your option for credit.
It was in the mid-1940’s that different individual businessmen started dabbling with the idea of a credit “card”.
The first official credit card was the Diners Club card, which entered the scene in 1950. The Diners Club company’s target audience was traveling businessmen with the goal of making paying for meals and entertainment while on the road easier for them.
In 1960, Bank of America issued the first credit card that mimicked what we see today, called the BankAmericard. As with all things progressive, competitors soon opened up and the “big three” of credit cards – Visa, Mastercard and American Express – were running the show by the time we entered the 1970’s.
Consumers and Credit Card Debt
When credit cards first made an appearance on the scene, those who were approved for cards like the Diners Club card were few and far between.
I remember that in the 70’s my parents – and many other parents that I knew – simply didn’t own a credit card because they couldn’t get approved for one. One had to show a proven higher income and propensity for repayment in order to get approved for a credit card.
In 1977, the Equal Opportunity Credit Act was finalized, making it illegal for credit card companies to deny a credit card application based on gender, race, national origin and marital status. The act also required that applicants who were denied credit be told in writing the reasons why.
While this was a great law on many fronts, it also dramatically broadened the ability of the average person to obtain approval for revolving credit.
The Beginning of the Consumer Debt Boom
When the 1982 recession ended, interest rates plummeted, people started to feel more secure in their financial situations and the use of credit began to rise dramatically.
The chart below shows the history of outstanding consumer credit card balances in billions.
(Link for chart: http://www.mybudget360.com/credit-card-withdrawal-banks-pull-financial-plug-bankruptcy-on-rise-bankruptcy-up-credit-down/ )
The ease of getting a credit card, the increase of marketing and advertising, and America’s increasing love affair with instant gratification meant people were spending more – whether they had the money to do so or not.
It soon became “normal” to have credit card debt.
These three facts from Wikipedia give hardcore numbers showing the increase of America’s comfort with using debt as a way to fund life without the cash to do so:
Household debt as a percentage of disposable income rose from 68% in 1980 to a peak of 128% in 2007, prior to dropping to 112% by 2011
S. household debt rose from nearly zero in the 1950s to $13.8 trillion in 2008, before declining to $12.9 trillion by Q2 2012
Consumer credit outstanding includes credit cards, auto loans, student loans, and other types of household debt, but excludes mortgages. It rose from 14.0% GDP in January 1990 to 18.0% GDP by January 2009. It fell to a trough of 16.4% GDP in July 2010 and was back up to 17.5% GDP by January 2013
As is evident, in spite of economic scares in the last decade, America’s love affair with credit is far from over. Proof of this lies in the fact that the average credit card balance of those who carry a balance is over $15,000.
As long as we as Americans continue to be comfortable carrying large amounts of consumer debt, we continue to put ourselves at risk for financial trouble down the road. However, there are things that you can do to help protect yourself from future economic downfalls.
Get a handle on your true financial goals. Figure out what you really want from your money and begin thinking long-term about your future financial security.
Design a workable budget for yourself and/or your family that helps you to achieve your financial goals – and stick to it.
Cut spending wherever necessary so that you can dump your debt as soon as possible. Keep your long-term financial goals in mind as you work to get out of debt.
Persevere through setbacks and temptations to buy. Keep in mind that the more financially secure you are, the more choices you’ll have about how to live life and the easier it will be to handle personal and external economic downfalls.
Carrying consumer debt balances has now become an acceptable way of life for many people, but it doesn’t have to be that way for you.
Join the growing number of people working to become debt free once and for all. I’m willing to bet you’ll find the end result well worth the effort.
How about you all? What debt fact in this article surprised you most?
Share your experiences by commenting below!
***Photo courtesy https://www.flickr.com/photos/smemon/12696360474/
