CREDITBUDGETING

The History of Credit in the United States

As a financial educator, the questions I receive most are about credit — how it works, ways to improve it and how to best manage it. Understanding credit and how to use it is one of the most crucial aspects of financial wellness, which is why I believe it’s also important to understand the history of credit within the United States. Although our current credit structure is more complex and relatively new in design, the need for credit has always been present in the U.S.

During the colonial period (1607-1776), most of the United States utilized the bartering system for goods and services. This simply means that goods and services were paid for with other goods and services. For instance, if you needed a goat for milk, you may have purchased the goat by offering your services as a horse farrier and cared for the goat seller’s horses for a specific period. However, difficulties arose when people couldn’t agree on a set standard for the exchange of goods and services. It wasn’t until British merchants arrived in the colonies that the bartering system became obsolete, as merchants began to set standards for goods and services as well as offering credit expecting repayment later, most commonly during harvest season.

By the late 1700s and early 1800s, local shop owners began offering credit. They would keep a tab open for people who needed everyday necessities such as groceries, clothing or furniture. It’s important to note that using credit or borrowing was considered shameful and was often done in secret at that time. This was standard practice until the first cars were built and Americans started using credit for larger purchases like homes and vehicles.

Prior to auto loans being available, Ford was the first company to allow consumers to pay for a vehicle in installments until it was paid in full with their layaway program. Unfortunately, this practice was short lived because Americans did not want to pay for cars they could not use immediately. To answer the call for instant gratification for a new vehicle purchase, General Motors filled the gap by offering the first auto loans. Ford followed suit shortly after. To help consumers avoid private lenders using predatory lending practices when purchasing a home, the Federal National Mortgage Association (Fannie Mae) was created in 1938. This was the first time the government created a network to connect borrowers and lenders. Up to this point, credit was primarily offered by private banks or individuals.

In 1950, the first credit card was offered by the Diners Club for travel and entertainment. This gave people the ability to purchase anything they desired instantly for the first time. However, unlike credit cards of today, it was required that balances were paid off each month. Eight years later, revolving credit was introduced to the American public by Franklin National Bank when they became the first financial institution to offer a credit card with the buy now, pay later option.

In 1989, the use of credit primarily in the form of credit cards hit the express track in Sioux Falls, South Dakota, when usury laws were lifted. Usury laws capped the amount of interest that could be charged based upon whether the product was a mortgage, an auto loan or a line of credit. When South Dakota lifted usury laws, Citibank relocated its credit card operations from New York City, which still had usury laws, to South Dakota. The state of Delaware followed suit by lifting their usury law shortly after. For the first time in American history, there were no caps on the amount of interest charged by credit card companies.

Today, credit reporting and credit card debt is a significant source of strain for many American households. With interest rates that can change at any given moment, learning to navigate the credit landscape is more important than ever for financial wellbeing. The average American has $90,460 in debt, which means it’s critical to understand how credit began and the ways that it has changed so you can manage your credit and your debt effectively.

Sources:

https://www.rocketmoney.com/learn/debt-and-credit/the-history-of-credit

(https://youtu.be/2mHsTKvAuZc?si=l_s6gJBLLQvJ5v8n

https://youtu.be/jEWaSNuFCfE?si=Y7EFFyLPOrTSD8f1

https://www.cnbc.com/select/average-american-debt-by-age/