All About Consumer Credit
With Canadian households the most indebted that they’ve ever been, you have to wonder how we accumulated so much credit. Statistics show that on average, for ever $1.00 that Canadians make, they owe $1.70.
“For many, many years consumers have relied on credit to make purchases. In our current day, we have low-interest rates, state-of-the-art technology and relatively easy access to credit. As technology and our digital landscape evolve, consumers become accustomed to the instant gratification and convenience that credit provides. However, when you don’t have the money in the budget to cover your spending habits, consumer credit overuse or misuse create debt problems,” says Jeff Schwartz, Executive Director, Consolidated Credit Counseling Services of Canada.
Have you gotten in over your head because of consumer credit use? Wondering how you can make your way out of debt? Call one of our trained credit counsellors at 1-888-294-3130 or check out our free online debt analysis.
“Consumerism has evolved over time as well and people have become desensitized to holding debt because the cost of living is high. Credit use has become a means to an end for Canadians. The result is high debt, low savings and a lot of financially vulnerable people,” says Schwartz. Have you ever wondered how it is that we got to this state?
Ancient history of consumer credit
You may be surprised to learn that the history of credit actually extends back thousands of years. The first known credit use is credited to 3500 BC, when the first urban clusters (i.e. cities) were established. The first credit was extended for agricultural loans.
Centuries later in Babylon, the Code of Hammurabi was written. This is important because it is when the idea of charging interest and establishing rules around the payment of that interest were established. They set the maximum ceiling for interest and also made it a requirement that for a loan to be valid it had to be laid out as a contract, complete with witnessing from a public official.
In the Roman Republic, it was noted that an individual bought a sizeable chunk of land for several carts of coins (the currency in the day). This person didn’t actually physically trade the coins for the land, but instead used paper and a promise to repay. This is notable because it marks a transition towards how credit became intangible, much like it is today.
Throughout the Middle Ages, credit was widely used. More regulations around charging interest were applied and the debate started around the fairness of capping interest rates.
The origins of credit reporting
Consumer credit started to look a little more like what we have today in the 19th Century, when the report of credit originated in England. Lenders sat down together and shared information on consumers who didn’t pay their debts. Over the following century, credit reporting went through various iterations until a widely used tracking system of creditworthy consumers was established, which is similar to what we use now for credit reports.
With the availability of big ticket items (i.e. the birth of the automobile), consumers didn’t generally have cash on hand to make a purchase outright, which is when car companies started issuing car loans. By about 1950, many retailers offered charge cards for their individual stores and a number of consumers had cards at various retailers. This presented a challenge in terms of maintaining, tracking and paying charge card bills, so the Diners Club card was issued, which allowed consumers to consolidate their purchases. This is what cards like Visa and Mastercard offer today.
As more and more cards were issued and technology advanced, the reporting structure on consumer credit changed and credit scores were established.
Types of consumer credit today
In today’s marketplace, consumer credit can basically be split into two categories: installment (closed) credit and revolving (open)credit. Installment credit is a closed loan that has set payments. Once you’ve paid the loan down, the debt is erased. An example of this is a car loan.
Revolving credit is where a consumer has a credit limit. They are able to take out credit up to their limit, pay it down and run it up again. The monthly payment is based on a combination of interest and principle, based on a percentage of your balance. This is how your credit cards and lines of credit work.
Both installment and revolving credit can be unsecured or secured debt. Typically, when consumer credit is secured, you get a better interest rate because there is more security for the lender.
How to use credit and technology wisely today
In our present day, credit and the technology that surrounds it can be beneficial, but there are risks if you don’t exercise prudence when using these.
Whatever type of credit that you take out, make sure that you fully understand the details, conditions and, costs of the debt. Use credit as part of your household budget, not as a way to “buy-now-pay-later” or to get your monthly budget to go further.
To avoid this risk, plan your credit use for specific purchases. Don’t spend more than you can afford. Pay your balance off every month to avoid interest accumulation. If you don’t pay the balance in full, at least pay more than the minimum. Don’t use credit cards just to get reward points. Check your credit report often and commit to cash use wherever you can.
Being able to shop and pay bills online is very convenient and is a great technological advance. However, with this improvement comes some risk. Never shop on sites that you don’t know well or that don’t have security software (i.e. their address starts with https://). Don’t share your PIN number, financial or personal information. Make use of automatic payment features, but follow up to make sure that there are no errors.
Your credit report has an impact on many important aspects of your life. Your ability to borrow money can impact your housing situation, your ability to have a car, and your ability to borrow money when necessary.
When you are shopping for a credit card, the free t-shirt is not going to save you money or provide you with convenience. Look over the features, benefits, and provisions to be sure that you are applying for a card that will fit your needs and benefit your financial situation, not hinder it.