According to the Wall Street Journal, Americans had more than $13.15 trillion in consumer debt by the end of 2017.
So, how did credit begin?
You might be surprised to learn that consumer loan interest and debt are the oldest financial practices in history. Over time, lending practices grew to meet the needs of creditors and consumers which revolutionized the financial industry.
Ancient Credit Procedures
The first known use of credit was in Mesopotamia in its southernmost city of Sumer around 3500 BC. Once known as gatherers and hunters, it soon became agriculturally-based which led to consumer loans for such development purposes. Etana of Kish, the first King of Sumer, is referred to as the leader who brought stability to the land. While no written history remains of Sumer, what is known is that this city founded the theory of consumer loans and interest.
It was in Babylon in 1800 BC that the Code of Hammurabi formally documents the legalities of credit and interest rates. The laws were harsh but fair as they gave rights to all citizens rather than the ones who had economic dominance. Debt, however, was widespread because of taxes which forced many citizens to borrow silver from local money lenders.
The code first addressed credit for grain by capping the interest at 33.3% per year. For silver, the ceiling was 20%. The system also stated that the debt had to be validated by a public official, but the creditors wanted collateral like homes or family members which were often difficult for debtors to overcome.
In 594 BC, a credit crisis took shape in Athens which led to widespread reforms based on the Laws of Solon. Athenian leaders tasked Solon with revising the Hammurabi laws to boost the economic crisis looming over its government and citizens. Not only were farmers on the cusp of an uprising, but debtors often endured enslavement along with their entire families. Once confined, they had no rights which often led to the separation and sale of families.
The laws not only brought about judicial reform, but it restructured the constitution which led to an end of slave practices. Solon also reformed the economic infrastructure by improving credit and debt practices. He also canceled debts, freed indebted slaves, minted coins, increased measurements, and devalued the drachma by 25% which stabilized the economy. Interest rates, however, were not regulated. That said, loan interest did not rise higher than 20%.
In 89 BC, The Roman Republic experienced a debt crisis that many historians contribute to the high cost of warfare. Most especially, the loans linked to land value, and wars with neighboring Italy affected their value significantly. As leaders needed funds for war, creditors increased interest rates and rescinded debts which removed coins from circulation. The debtors, in turn, borrowed from other lenders and paid higher interest to stay ahead of debt collectors.
Eventually, just a whisper of war brought about mass economic destabilization which caused massive amounts of bankruptcies and financial ruin. After the debt crisis in 63 BC, Romans considered a revolt because of the high level of debt. Cato the Younger fought against debt reform after a tribune in 63 BC proposed debt cancellation.
Catiline, heavily in debt after bidding twice for a consulship, took advantage and began a campaign to overthrow Cicero which failed. Taking debt in stride, Cicero joked about revolting after purchasing a house on credit from Crassus for 11.5 million sesterces. He wrote on the land contract for the home that he had used credit for his purchase.
The European Dark Ages
After the Western Roman Empire collapsed in 476 CE, Europe entered the Dark Ages and economic engagement came to a standstill. By 800 CE, the Roman Catholic Church banned usury by citing Luke 6:35 in the Bible. Under Charles The Great, Charlemagne’s Rule stipulated that no one in his empire could charge interest on loans. In 1311, Pope Clement V reconfirmed the ban as absolute and made clear that any legislative decree would be null and void.
Toward the end of Reformation and the start of the Age of Discovery in the 1500s, exploration was at the forefront of significant expansion as merchants looked to prosper from new trade routes which required capital. Investors even argued for the need for loans to establish trade strongholds in the New World. In 1545, England was the first in Europe to re-establish interest rates under the leadership of King Henry VIII which he set at 10%.
By 1787, Jeremy Bentham argued in A Defense of Usury that restraints on interest rates prevented economic growth since citizens needed capital for innovative progress. Bentham also made a case against usury in that the risk associated with lending should not bind to a set rate since the value of loss was significantly higher than that allowed for loans and collection.
In 1791, the newly formed United States created the First Bank because the government owed debts from the Revolutionary War. States had previously minted their coins and were bankrupt which prompted leaders to address the need for federal currency.
Alexander Hamilton created the First Bank, and the members of Congress drafted its charter. President George Washington signed the document which established protocol and led to the mint of its first coin bearing Lady Liberty. The bank lasted until 1811 when Congress voted to do away with the banking system. Today, it is the home of the Civil War Museum of Philadelphia.
By 1803, consumerism was on the rise, but so was debt as the Industrial Revolution was manufacturing goods at an alarming rate. These mass-produced items were cheaper and readily available. Credit practices increased debt which also enhanced the need for consumer knowledge about lending and debt procedures.
Consumerism is an ideology born at the turn of the 19th-century that advocates consumer protection rights that they believed should tie into the consumption of goods and services. With capitalism, it propelled the investment in finances, communication, transportation, and mining. With the Industrial Revolution came economic stability, but the working class did not see the same level of success as their wages did not entitle them to buy the very products they created.
Changes In Consumer Rights
In English societies, not paying merchants was considered a blemish of an English gentleman’s honor. By 1819, a group of liberal textile shop owners came together in Manchester to discuss political reform. It is during one of their meetings that the Manchester Guardian newspaper formed which promoted religious and civil liberty.
The first newspaper publication was on May 5, 1821. By 1826, the Manchester Guardian Society formed and printed monthly reports about debtors. In effect, industrial tailors allied to share customer information and debts which gave birth to credit reporting.
By 1841, New Yorker Lewis Tappan founded the Mercantile Agency in which agents used hearsay, character, and assets to assess the risk of debtors and decrease creditor losses. As businesses expanded nationally, it became even more challenging to gauge creditworthiness.
In response, the company changed its name in 1859 to R.G. Dun & Company. It would later merge in 1933 with Bradstreet Company to become Dun & Bradstreet, Inc. It was the first company to establish an alphanumeric tracking system which was still in use well into the 1900s.
In 1899, Cator and Guy Woolford founded The Retail Credit Company in Atlanta, Georgia which began creating lists of customers who were creditworthy. By 1920, they had offices across the United States and Canada. By 1975, the company became Equifax and now serves over 88 million creditors and consumers. It also serves as the oldest of the credit reporting companies.
In 1908, Henry Ford created the Model T and made it available to consumers who did not earn enough to pay in full. In 1919, General Motors Acceptance Corporation (GMAC) started a loan program for GM dealers so that consumers could buy cars with only 35% down while receiving financing on the balance. More than two-thirds of purchasers chose to use the installment plan.
The success of their program prompted other companies to use installment plans which led to higher growth of goods and services because of the access to merchant credit accounts. By the 1930s, U.S. consumers purchased most products in installments. It also promoted a friendly consumer competition in that whatever one neighbor had, the other wanted one better.
Between 1929 and 1945, World Wars I and II prompted business to use war as a marketing tool that promised their goods and services would become available in times of peace. After the war ended, an eagerness ensued which promoted growth because of consumer spending habits.
In the 1950s, consumers had access to credit accounts, but it also created confusion as they had multiple bills to pay monthly. In response, Frank McNamara, Alfred Bloomingdale, Ralph Schneider, and Matty Simmons founded the Diner’s Club credit card which then led to other institutions offering charge cards that had universal purchase powers with only one payment.
Changes In Credit Reporting Practices
Before the widespread access to consumer credit, reporting agencies used index cards to update consumer changes. Their system used public notices and newspapers to track, monitor, and update changes like employment, arrests, marriages, or deaths which made it difficult to continue as the number of creditors and debtors grew. The credit reporting agencies had to find new and innovative ways to monitor credit nationally, but it also led to a host of other credit providers.
In 1850, William Fargo, Henry Wells, and John Butterfield founded American Express. In 1852, William Fargo and Henry Wells started Wells Fargo Bank. By 1958, Dee Hock founded Visa. Not to be outdone by independent creditors, a coalition of California bankers went on to start Mastercard in 1966.
There was also another critical beginning in 1956 as Earl Isaac and Bill Fair started a data analytics company called Fair, Isaac and Company which focused mainly on credit scoring and consumer-based analysis. They would later play a significant role in credit scoring.
With so many credit and lending agencies across the United States, the focus shifted to the limitation of credit bureaus to provide current data since they only issued credit reports annually. The United States government and the Association of Credit Bureaus worked jointly in 1964 to research computer technology aimed at improving credit reporting. It also prompted new strategies that made credit applications more universal.
In 1970, federal legislation passed the Fair Credit Reporting Act which created a national infrastructure for credit reporting agencies. It would take until 1980 for Equifax, Experian, and TransUnion to establish a unified system for credit checks. In 1989, the Fair, Isaac and Company changed its name to FICO which became the standard for the measurement of consumer risk.
FICO is still used by nine out of ten institutions. In 2006, TransUnion, Equifax, and Experian jointly ventured into credit scoring with the foundation of VantageScore. The business model also helps millions of consumers build a credit profile which is vastly different from FICO. It does not, however, identify as a credit repair company or focus on credit repair services.
The Age Of Information
Just as in earlier times, creditworthiness is a badge of honor which is why many agencies use credit scores for risk assessment in industries like finance, housing, employment, and education. With the increase in debt, it also brought bankruptcies which promoted a new sector of credit repair companies. These agencies offered credit repair services that helped people with below average FICO scores and credit history to regain their standing with creditors.
Unfortunately, once something is on your credit history, it can be stressing and time-consuming to get credit bureaus to remove it. Lexington Law Review is one of the top credit repair companies in the United States that helps individuals with just such issues. For someone with no or bad credit, it is well worth the value of investing to repair your reputation. The experts at Lexington Law Review will also monitor your history so that you know when changes occur.
Did you know that credit history was so complicated?
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