The History of Credit
We are going to look at the long history of consumer credit history from the earliest pieces of documented history to the modern “golden age” credit boom of the early 20th century. Over several millennia, credit booms and ground-breaking innovations – we will go through centuries of time. From the Dark Ages, when the practice of charging interest was called usury by some, to early 19th century when the foundation of our modern credit reporting system took root with English tailors joining together and in clubs to exchange information about customers who had not paid their debts – let’s review the timeline below on the history of credit (source: Equifax).
The sumerians built the first urban civilization that we know of. They use consumer loans for agricultural purposes.
Babylon had the Code of Hammurabi, a legal decree formalizing laws around credit. To be valid, loans had to be witnessed by a notary, or public official, and recorded as a contract.
Cicero of the Roman Republic documents that his neighbor purchased 625 acres for 11.5 million sesterces. Cicero then says it his neighbor “used credit to complete the purchase.”.
Jesus Christ is born and he is proclaimed as the Messiah, or Savior of the World. Christ fulfills thousands of years of prophecy in the Old Testament. Creditors were lending money left and right at high interest rates, impoverishing many. This is what is called “Usury” and usury was rampant during the time of Christ.
After the collapse of the Roman Empire, the economy came to a screeching halt. This is what is called the Dark Ages. Europe was falling apart when the Church stepped in and banned all “Usury”. The Church cites Luke 6:35 “…lend, expecting nothing in return”.
European explorers and merchants begin sailing to faraway lands and need capital and credit. After the reformation, King Henry VIII set interest rates for capital and credit at 10%
Philosopher Jeremy Bentham writes “A Defense of Usury” arguing that restrictions on interest rates for capital and credit harms the ability to innovate. If lending money out is too risky, then nobody will want the funding and growth becomes limited.
Credit reporting originated in England in the 19th century. English tailors would swap information about customers who did not pay their debts – this is where credit reporting originated. The Manchester Guardian Society issues monthly newsletters with information about people who took out credit and failed to pay their debts.
The Mercantile Agency is the first company to establish an alpha-numeric system to track creditworthy companies. This system was used up until the 20th-century. The Retail Credit Company begins compiling lists of creditworthy customers.
Henry Ford’s Model T makes automobiles accessible to the great multitude of people. However, they are still too expensive to buy with cash for most families. General Motors is founded and begins instalment plan financing. People can purchase a vehicle with a 35% down-payment.
US Factories pump out cheaper consumer products and appliances. Now appliances and new technology like phonographs, radios, etc. can all be purchased on installment plans.
Diners Club introduces their charge card, which opens the floodgates for consumer credit products. The Diners Club card was presented with an annual fee, did not offer revolving credit, which had to be repaid in full each month, and charged merchants and participants a 7 percent charge. 79 Franklin National Bank of Long Island introduced the first all-purpose credit card. When the Diner Club started, it made money by charging shops a 7% fee on each transaction.
Early credit reporters used millions of index cards and massive filing cabinet systems to keep track of consumers around the country. To get the latest up to date information, agencies hire researchers to search newspapers, arrest warrants, marriage, and death certificates, etc. to attach information to individual credit files.
Bank Americard is the first credit company to offer the general American public credit for a wide range of purchases.
The three largest credit bureaus, Equifax, Experian and TransUnion have universal credit reporting covers across America. The FICO score becomes the standard system to measure credit scores based on objective factors and data.
The internet and cloud computing have enabled a new era in consumer credit and credit reporting. Today, credit reports are used today to inform banks, businesses, help consumers make informed decisions on housing, employment, insurance, and cost of everyday living.
What is Credit History
A credit history is the record of how a person in the past has handled their credit, including the debt load, the number of credit lines, and the timely payment of any expenses. Credit reports are used now to make a wide range of life choices, from where people live and work to how much they pay for insurance and utilities, but the story is just as important as the document itself. Like debt, there is a 5,000-year history of credit reporting and personal practice.
Lenders look at the credit history of potential customers when deciding whether to offer a new line of credit or help determine the terms of the loan. Employers and landlords use the credit history to assess job candidates and potential tenants.
Key Takeaways A credit history is a record of your ability to repay debt and show responsibility for repaying it. Consumers have guaranteed access to their credit history and reports and are entitled to a free credit report on an annual basis from each of the credit reference agencies. Your credit report contains information about the number and nature of your credit accounts (initial accounts, outstanding amounts, amount of available credit used, invoices paid on time and number of recent credit requests).
How Credit Scores Work
Credit scores are three-digit numbers, and they can have a significant impact on your financial life. Your credit rating (for most people there are more than one) affects your ability to qualify for loans and credit cards and gives potential lenders a feeling of how likely you are to repay your debt. We rely on credit for many important things in life, whether it is buying a car, a house, a computer or a student loan. A personal credit score also determines the amount of the initial deposit required to rent equipment, purchase a smartphone, cable service, utilities, or apartment. A measure used to calculate a credit score is credit utilization, i.e. The percentage of available credit used.
Credit ratings are one way in which banks, credit card companies, and other institutions estimate the likelihood that you will be able to repay your accumulated debt. Credit ratings are also what several third-party lenders use to assess the risk of lending you money.
Credit scores are a number those lenders use to decide how likely they are to be able to repay a person every time they lend a loan or credit card. The most heard credit scoring system in the United States is the FICO score, the score used by the major credit reporting agencies to assess your credit rating.
A decent credit score is critical to your financial well-being, and the higher it is, the lower the credit risk you face. A high score can help you get access to lower interest rates, better loan terms and more credit options while a low score can prevent you from getting credit at all.
Potential lenders, such as credit card companies and mortgage lenders, use information about your credit history to decide whether to lend to you. In several ways, you can create a credit history, including by taking out a small personal loan or applying for a credit card with a small available credit balance.
At the most basic level, you need some form of loan, whether in the form of a credit card or something else, to build up your credit score. You are responsible for using the credit card and get into debt, so you have a credit score, so to speak.
We do not know what the future of credit scores will look like, but the credit score system has fewer errors and more fairness. Many Americans see their valuation as something that claims to describe credit history and attitudes toward debt as normal and natural.
How Banks Determine How Much to Loan Someone
Credit reporting agencies report, and track credit usage and individual lending behavior used by banks, credit card companies and other lenders to make informed credit decisions. Armed with information from these agencies, creditors were able to lend to more borrowers, ushering in the era of buy-to-pay and the Roaring Twenties, which helped stimulate and transform the US economy.
Consumer credit is defined as money for goods and services provided to a person without immediate payment. Common forms of consumer credit include credit cards, branch cards, car finance, personal loans, installment loans, consumer loans, payday loans, retail loans, as well as installment loans and mortgages.
Given the size and nature of the mortgage market, many observers classify mortgage loans as separate categories of personal borrowing, and home mortgages are often excluded from definitions of consumer credit like that adopted by the US Federal Reserve. This is a broad definition of “consumer credit,” which is the Bank of England’s definition of lending to individuals.
Merchants have used credit for thousands of years to help their customers finance their purchases. Consumer credit, the earliest and most common form of consumer credit, started when local shops allowed customers to foot the bill for their purchases. For example, seeds could be sold on terms to farmers who allow payment after harvest.
Bank credit cards were the first large-scale introduction of adjustable interest rates for consumer loans, which exposed borrowers to the risk of fluctuating interest rates. Diners Club was the first credit card that could be used for entertainment and travel needs. Popular credit cards were accepted by a variety of merchants and retailers, and they allowed cardholders to take balances with them month after month. Credit cards issued on behalf of banks around the world worked with the companies that issued them, and these cards increased the purchasing power of services by allowing consumers to accumulate revolving credit.