The Evolution and History of Consumer Credit and Debt in America

Believe it or not, America’s love-hate relationship with credit began before the 1900s. The earliest and most common form of credit were loans from local shopkeepers. That’s right, hardworking Americans ran tabs to buy groceries, furniture, farm equipment and the like when times were tight. It’s also a common myth that borrowing was unheard of during those days. While it’s true that many disliked like the idea of debt, it became a way of life as people found it necessary to purchase necessities. Unlike today, it was thought to be shameful to borrow money for pleasure. Below is timeline of the history of credit in America.
19th Century: 1801 - 1900
Buying a home was difficult from 1800 - 1850 because many lenders and banks thought mortgage lending was too risky. Instead, credit was extended privately through individuals. Around 1830, financial institutions, such as the building and loan society, (B&L) began offering mortgages. Interestingly enough, loans were based on the 15-year variable interest rate model. Borrowers would pay $7 - $11 per month and the full amount at the end of the term. Many mortgage lengths were even shorter than that at 3 - 6 years!
1900 - 1960
Introduction Of The First Credit Bureau
Atlanta-based Retail Credit Company (RCC) was the first credit bureau founded in 1899 and began collecting data on Americans. They not only collected credit information, but political and social preferences as well as rumors about people’s personal lives which caused criticism over the years. Because some of the facts were suspect, the government wouldn’t allow them to automate this information.
Cars
The first automobile in America was the 1908 Ford Model T. The car cost $850, about the equivalent of $20,000 cash for a car today, which was unattainable for many Americans. Henry Ford, founder of the Ford Motor Company in 1903, didn’t like debt, so he’d allow consumers to put their car on layaway, making weekly payments until it was paid off and they could take their car home.
As expected, many consumers didn’t want to wait until their car was paid off to drive it home. In 1919, General Motors moved to the head of the line when they created the General Motors Acceptance Corporation to provide customers with car loans.
To compete, Ford set up an auto loan subsidiary in 1928, allowing installment loans so customers could drive off with their new vehicle.
Mortgages
Federal National Mortgage Association (Fannie Mae) was created in 1938, the first example of the federal government creating a national network to connect investors, lenders and mortgage borrowers.
From 1940 - 1960, mortgage lending increased from 44% - 60% with the enactment of the GI Bill of Rights in 1944. With this lending increase, American families increased their home-borrowing from 19% of households in 1949 to more than 40% by 1967.
Credit Cards
The first credit card was the Diners Club card in 1950. The card was used for travel and entertainment and the balance had to be paid every month.
In 1951, the first bank credit card was introduced by Franklin National Bank, based in Long Island, New York. It didn’t take long for others to see how lucrative credit cards could be, and by 1953, there were 60 credit card plans in the United States.
In 1958, most credit card issuers began allowing revolving credit, which meant that credit cards didn’t have to be paid off in full each month.
1960 - 1990
Growth Of Credit Bureaus
In 1968, TRW Information Systems was founded to acquire credit data, followed by the creation of TransUnion®, another credit bureau, in 1969. TRW later sold to two private equity firms as ExperianTM in 1996.
In 1970, the Fair Credit Reporting Act (FCRA) was passed. This required credit bureaus to make their information public and remove any data that may cause discrimination, such as race, sexuality and disability.
RCC changed its name to Equifax® in 1975, solidifying the three credit bureaus as we know them today: Experian®, TransunionTM and Equifax®.
The three agencies partnered with a technology company, Fair Isaac and Company (FICO®) to create a credit score and in 1989, the first FICO® Score for general use was introduced.
1990 - 2019
In 1995, Fannie Mae and Freddie Mac mortgage lenders began using FICO® scores to determine if a consumer qualified for a mortgage.
In 2006, the three major credit-reporting agencies decided to create a new score in competition with FICO® called the Vantage Score. It started with a different credit score range, but eventually adopted the 530 - 850 model as well and is now used widely by lenders to determine credit-worthiness.
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