It’s no secret that the prevalence of consumer credit has changed how American’s consume and purchase goods. The typical American now has $38,000 of consumer debt excluding their mortgage. To better understand why the current state of American consumer credit, let’s take a trip down memory lane to see how we got here.
A brief history of consumer credit
1910 — 1930
What’s crazy to me is the realization that this mentality of ‘buy-now-pay-later’ was non-existent only 100 years ago. Buying things on credit was not common before 1917. Why? It was illegal for lenders to charge interest rates high enough to make a profit. Consumer credit didn’t exist! By 1920, with the end of World War 1, demand for consumer products skyrocketed. US Lawmakers wanted to crack down on loan sharks of the prior decade so they made it easier for ‘respectable’ banks to issue consumer credit. What happens when you mix relaxed credit laws and the legalization of personal loans with consumer demand for stuff? The birth of the American credit industry.
1930 — 1950
The major life event for most Americans in the 30s was the Great Depression. It was raging. To keep the financial industry afloat, the US Government relaxed lending laws to make it even easier for consumers to obtain personal loans. By the end of 1939 America was in World War 2 which lasted until around 1945. As our soldiers returned home, the improved and the lending laws of the early 30s were still in force. This momentum set the stage for the greatest invention since sliced bread — the credit card. By the 50s, access to personal lines of credit became easier and as a byproduct, consumer debt became socially acceptable.
1950 — 2019
Over the past 50 or 60 years, consumer debt has gone from something people were a little ashamed of to a social norm. In 1970 only 16% of Americans had a credit card, by 2000, over 70% of Americans had at least 1 general-purpose line of credit! And unfortunately as access to credit increased, personal savings decreased. A typical family saved between 10%-12% of their annual income in 1970 but by 2018, personal savings as a percentage of household income has dropped to under 3%. Nearly 40% of Americans reported they would not be able to pay their bills if faced with a $400 unexpected emergency.
In a recent study published by the US Census, it was determined that all forms of consumer debt, secured and unsecured, across all age ranges increased, with secured debt (houses, cars) increasing by almost 50%.
The Aspen Institute published a primer on consumer debt in 2016 which concluded that 69% of Americans consider consumer debt a necessity in their own lives. This insanity has to end. With the average car payment now at $508 over a 60-month installment window, it is no surprise that 8 out of 10 Americans live paycheck to paycheck. So on this President’s day 2019, I’ll leave you with 10 more facts about American consumer debt that should scare the sh*t out of you and act as a firm reminder that credit cards are the cigarettes of the financial services industry. Do not become a slave to the FICO master, live a life of independence with no debt!
10 more facts about American consumer debt
- Americans are $12.58 trillion in debt.
- It will take 18 years to pay off the average credit card balance.
- 1 out of 4 Americans have more in debt than savings.
- There is over $1.3 trillion dollars of student loan.
- 73% of Americans die with debt.
- Americans have over $1.6 trillion dollars of auto loans with an average payment of $508 a month.
- On average, each household with a credit card carries $8,284 in credit card debt.
- 72% of Americans feel “stressed out” about debt and 22% feel “extreme” stress over the finances.
- 1 out of 10 people with student loan debt will default on a payment at some point in their life.
- Only one percent of individuals eligible for the “Federal Loan Forgiveness Program” actually had their student loans forgiven in 2018.