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A Brief History of U.S. Consumer Credit – Part 2: Consumer Credit Becomes a Right

Esusu • August 20, 2021

Pressed for time? Here’s a summary.

While the first half of the 20th century saw the beginnings of modern credit systems, they matured in the second half. In the 1960s, everyday shopping moved from installment credit to revolving credit. However, this only happened for those who could afford a middle-class lifestyle. Those in underdeveloped urban areas continued to have limited access to credit. 

Those in urban areas only had greater access to credit when predominately wealthy white women pushed to end sex discrimination with the Equal Credit Opportunity Act (ECOA) of 1974. This law helped fuel the invention of credit scores and credit bureaus rose in importance. By the 1980s, credit cards took over and most everyone could qualify. As credit access expanded, so did its role in American lives. To participate in the U.S. economy means using and managing your credit well. Esusu can help. Learn more here.

Introduction: Part 1 Summary

In part one of this two-part series, we saw how the foundations of our modern credit system were formed. The 1920s through 1950s introduced Americans to installment credit, long-term mortgages (and suburban living), and revolving credit. These innovations forever changed the U.S.’s relationship to credit. Consumers embraced credit and used it to improve their quality of life, for the middle-class and affluent at least. 

Through the 1960s to late 1990s, department stores, protests, and computers will help credit go from an option to a necessity. Let’s uncover how in the last part of this two-part series.

 

 

The 1960s: Department Store Credit, Suburbs, and Urban Unrest

 

Revolving Credit and the Suburbs

It might surprise you, but the first everyday consumer credit cards had little to do with banks and everything to do with department stores. Suburbs were developed with cars in mind. (It was expected that the average suburbanite owned multiple cars.) Shopping malls and parking lots sprung up to make the consumer experience more convenient and pleasurable for those with steady paychecks.

In the early 1960s, if you were new to a suburb, you might receive an unsolicited Charga-Plate in the mail. Competition between stores for customers was fierce. Since consumer credit was built on long-term relationships, every store wanted to have an upper-hand.

At the same time, department stores began transitioning from installment credit plans to revolving credit plans. These credit plans made revolving credit closer to what we know today. With a revolving credit plan, there were no more fixed repayment terms. Items bought would no longer be repossessed if customers defaulted. Customers paid a percentage of the balance and interest on the unpaid balance. On this plan, they’d be in charge of when and how they wanted to repay. 

Bank-issued credit cards were not allowed to be used in large department stores. Where they could be used was at small retailers that hoped to compete with department stores. Grocers, hotels, restaurants could also extend credit to shoppers by being part of a bank’s credit network. It won’t be until the 1970s that bank-issued credit cards can be used everywhere. 

 

Credit and Urban Unrest

While suburban shoppers moved from installment to revolving credit, this did not happen for low-income and poor Americans. Mostly living in underdeveloped urban neighborhoods (due to 1930s housing policies), they paid higher interest rates for lower quality goods than those in the suburbs. Since these Americans often had unstable incomes, revolving credit’s flexible repayment terms would’ve helped them. Yet, they were stuck with inflexible installment terms and risked repossession if they missed payments.

If you were in this situation and wanted to participate in modern life by owning a TV or even clothes, you had to buy with credit and risk repossession. Maybe you thought of going to a store in a different neighborhood. But to shop with credit means you need a history with that retailer. Otherwise, they’d need to check your credit references. If your credit references are with low-income retailers or you have none, it was unlikely you could shop outside your neighborhood.

High prices, low quality goods, and limited credit options were more than enough to make anyone protest. If you were in this situation, you probably did protest by refusing to make payments. As a result, you’re deemed less creditworthy and repo men would show up to take away your TV or whatever you bought. On top of that, the whole neighborhood would know about it.

These conditions pressurized and exploded in 1968. While the Protests of 1968 are often known as a turning point for the Civil Rights Movement (it was), they were also a pushback against the harsh credit system for those in underdeveloped neighborhoods. 

The stores that were burned during these protests all sold on credit. Protestors hoped that burning shop records would erase their debts and allow them to start over. What they didn’t know was record books were often kept in multiple places and offsite. 

Equal access to credit for all wouldn’t come until the 1970s, when upper middle class white women ended credit discrimination.

 

 

The 1970s: Women, Credit Equality, and Credit Bureaus 

 

Women and Credit Equality for All

Prior to the Equal Credit Opportunity Act of 1974 (ECOA), it was difficult for women to access credit. When a woman got married, her credit history merged with her husband’s. 

Say you are a woman and had your own income and credit cards before marriage. Upon marriage, you would need your husband’s approval to apply for and shop with credit. Since credit eligibility was determined by a loan officer and not yet a number, be prepared for the following:

  • Questions about your fertility
  • A referral to marriage counseling, if it’s suspected your marriage is in trouble
  • To be listed as a dependent
  • Told your income can’t be included when determining your household credit limit 
  • Told you need a co-signer (your husband) 
  • Denied credit if you are single 

In addition, any credit built up during the marriage would follow your husband. If your marital status changed due to divorce, or if you became widowed or abandoned, you’ll have a gaping hole in your credit history and can be denied credit.

Women winning the battle against sex discrimination paved the way for other forms of discrimination to end when it came to accessing credit.  

 

Credit Bureaus and Computerization

The ECOA not only helped more people gain access to credit, it also helped the development of the credit score

As credit became more important in American life, so did credit bureaus. Banks, department stores, and any company that gave out credit needed to investigate consumers to determine their eligibility. For lenders, working with credit bureaus was cheaper and more efficient than running an in-house credit investigation team. 

Early credit investigations were an assault on privacy. If you were part of the middle class in the 1960s, the local credit bureau would send someone to your home as soon as you moved into a new neighborhood. They would usually send a woman, who’d try to talk you, especially if you’re the wife. This woman credit investigator would come with gifts and ask a number of very personal questions, such as:

  • The husband’s work
  • The number of children
  • Religious beliefs
  • The number and kind of cars you owned

Once the investigator got back to the office, she’d record all answers in a report along with an assessment of how clean the house was and any furniture that still seems needed. A copy of the report would be sent to local retailers and you can expect to receive an unsolicited Charga-Plate, if you qualified.

With the ECOA, this type of investigation ended. To appear more “objective” and neutral, statistics and numerical models were used to determine credit eligibility instead. This was timely as computing was growing popular. Credit bureaus began moving consumer information from files to data banks. While this seems like a good change, using numerical models to determine credit access led to other issues, such as discrimination based on zip codes

Throughout the 1970s, credit bureaus grew in importance. Using credit scores helped these companies centralize and grow nationally. It also allowed for individualized interest rates. At the end of the 1980s, the Fair Isaac Corporation or FICO score would be developed to standardize all credit scores.

 

 

The 1980s and 1990s: Credit is a Necessity and Right

Prior to the 1960s, you needed a job to get credit. By the end of the 1960s, you needed credit to get a job. Expanding credit access to all during the 1970s became a moral obligation. If you wanted to participate in the American economy, credit was a necessity and thus, a right. 

What did a right to credit mean? 

In part, it meant a credit card takeover. Once the stronghold of large department stores and local merchants, universal credit cards such as VISA and MasterCard rose in popularity during the 1980s and 1990s. No longer a courtesy, Americans expect retailers everywhere to offer credit. More retailers, restaurants, hotels and other industries joined credit networks to stay competitive. 

In the 1980s, credit cards came to symbolize wealth and care-free spending. Prestige cards (Gold, Black, Platinum) with higher limits were created, which allowed some to move large expenses onto cards. 

Affinity cards were created for specific groups such as dentists and soldiers. Universities offered students credit and often received a cut of repayments. Banks assumed that students’ future incomes would allow them to repay any debt they racked up in the present.

New innovations such as home equity loans, created new ways to borrow. By the end of the 1990s, 2/3 of American households used bank-issued revolving credit. (In the 1970s, only 1/6 of households did.) More people could borrow and they could borrow more than ever. 

By this point, the credit system has become the central organizer of American life. Every American has a credit rating. This rating, our credit score, affects the foundations of our lives: housing (renting and buying), education, food and clothes, and job qualification. 

Credit is critical to our participation in the U.S. economy, as a worker and consumer. Developing a healthy credit history means using credit. Being a responsible credit user means proving you are able to borrow and repay debts. 

 

Recap and Conclusion 

In the first half of the 20th century, Americans saw the rising importance of credit. By the second half of the century, credit access expanded and became a necessity for all those who participate in the U.S. economy. 

In the 21st century, credit is still undergoing changes due to technological advances. Just in 2006, the three credit bureaus (TransUnion, Experian, and Equifax) came together to create Vantage Score, a new standardized credit score. Big data, artificial intelligence, and other innovations are being developed to provide greater accuracy to creditworthiness. With these new technologies, it’s hoped consumers will have greater access and control over their credit identity and information.

 

References

Desjardins, Jeff. “The History of Consumer Credit in One Giant Infographic.” Visual Capitalist. August 29, 2017. https://www.visualcapitalist.com/history-consumer-credit-one-infographic/

“The History of Credit.” Rocket HQ. June 4, 2021. https://www.rockethq.com/learn/credit/the-history-of-credit

Hyman, Louis. Debtor Nation. Princeton: Princeton University Press, 2011. 

Kreiswirth, Brian and Anna-Marie Tabor. “What you need to know about the Equl Credit Opportunity Act and how it can help you: Why it was passed and what it is.” Consumer Financial Protection Bureau. October 31, 2016. https://www.consumerfinance.gov/about-us/blog/what-you-need-know-about-equal-credit-opportunity-act-and-how-it-can-help-you-why-it-was-passed-and-what-it/

Olegario, Rowena. “History of Credit in America.” American History. Oxford Research Encyclopedia, May 23, 2019. https://oxfordre.com/americanhistory/view/10.1093/acrefore/9780199329175.001.0001/acrefore-9780199329175-e-625

Smith, Stephen. “The American Dream and Consumer Credit.” A Better Life. American Public Media. Accessed July 8, 2021. https://americanradioworks.publicradio.org/features/americandream/b1.html