Lesson 5 - Overview

Credit is an arrangement to receive cash, goods, or services now and pay for them in the future.  Consumer credit refers to the use of credit for personal needs (except a home mortgage) by individuals and families, in contrast to credit used for business purposes. Many people use credit to live beyond their means, largely because of a change in perception about credit. Past generations viewed credit as a negative and used it very sparingly. Society today has popularized credit with phrases such as “Life takes Visa,” “Priceless” campaigns, and even references to a “Plunk factor” when using a sought-after credit card. That said, when used appropriately, credit can be a very useful tool. 

Consumer credit is based on trust in people’s ability and willingness to pay bills when due. It works because people by and large are honest and responsible. But how does consumer credit affect our economy, and how is it affected by our economy?

Consumer credit dates back to colonial times. Although credit was originally a privilege of the affluent, farmers came to use it extensively. No direct finance charges were imposed; instead, the cost of credit was added to the prices of goods. With the advent of the automobile in the early 1900s, installment credit, in which the debt is repaid in equal installments over a specified period of time, exploded on the American scene.

All economists now recognize consumer credit as a major force in the American economy. Any forecast or evaluation of the economy includes consumer spending trends and consumer credit as a sustaining force.