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THE PROS AND CONS OF A CREDIT SOCIETY by CYNTHIA CARLSON/Assistant Editor Without credit, hardly anybody would be able to buy a house, Detroit would become a ghost town, and millions of Americans would have to do without televisions, ranges, and refrigerators. Most of the people now employed in making the products sold on credit would be unemployed, and most of the people now working for those companies' suppliers would be out of jobs, too. —The Credit Jungle, by Al Griffin, a specialist in consumer credit. Part of the American way of life since colonial times, when farmers borrowed against crops at the general store, consumer credit is more widely used in the United States than in any other major country in the world. Of 70 million families in the US, about half owe some installment debt (excluding mortgages and medical bills), according to William C. Dunkelberg, associate director of the Credit Research Center at Purdue University. Although the total amount of installment debt owed varies considerably, Dunkelberg reports that every family with such debt owes, on average, more than $4,000. Statistics show that consumer debt in this country has increased more than 50 percent within the past three years. Delinquency rates on installment loans in 1975 reached a 25-year high, and bankruptcy filings increased more than 30 percent. Of the $161.8 billion in consumer installment credit outstanding at the end of 1975,46.8 percent was held by commercial banks, 24 percent by finance companies, 15.6 percent by credit unions, 11.3 percent by retailers, and 2.2 percent by mutual savings banks, savings and loan associations, and automobile dealers combined. Use Of Credit The concept of credit is closely associated with credit cards, which took a foothold at the start of the twentieth century when a few hotels began to issue them to regular patrons. By 1914, large department stores and chains of gas stations were using them. During the 1950s and '60s, airlines, phone companies, and car rental firms followed suit. Along with this came the concept of the third-party credit card. Today there are enough credit cards in circulation to provide one for every person in the United States. William Dunkelberg estimates that more than half a billion cards for credit, charges, or cash transfers are in use in the US, accounting for at least $120 billion in transactions each year. One or both of the two major bank cards—Master Charge and BankAmericard—can be found in about one-third of all households. It has been estimated that at the beginning of the 1970s, there were more than 50 million bank credit cards in circulation; five years earlier, before the credit card explosion, there were only five million. By 1975, the number had risen to 55 million. In mid 75, the average monthly balance outstanding on the two major bank cards was about $340. Two-thirds of all cardholders constantly use revolving credit and rarely pay bills in full. Banks count on this. If everyone paid their bank card bills by the billing deadline, all banks—not just those few that are doing so—would have to impose fees to supplement the expense of servicing the accounts. William Dunkelberg has found that installment buying serves as a good budgeting device for many consumers who find it difficult to save effectively. In a study he did at the Credit Research Center, he also found that consumers— whether consciously or unconsciously—can decide if they will benefit economically by using revolving credit. In the study, which involved the purchase of washers and dryers, he found that the rate of return on owning a washer and dryer compared to the cost of going to a laundromat is "exceptionally high," even if time is valued at only $1 an hour. "The money you save in terms of the cost of your driving, the cost of your time, the cost of running the washer and dryer makes the rate of return look like 40 or 50 percent for eight to 10 washer loads. This indicates why consumers are fairly insensitive to what it costs to borrow. They don't care whether they're paying 10, 12, or 14 percent, if the rate of return is going to be 50 percent." The most economical way to borrow is to borrow against accumulated assets, which may be in the form of a savings account or in the form of stocks and bonds. One bank in New York lends up to 70 percent of the value of securities listed on the New York Stock Exchange and up to 60 percent of the value of those on the American Exchange. Where to Obtain Credit To measure the considerations that affect the interest rate charged on a loan, banks traditionally have used a formula called the 3Cs of credit—character, capacity, and collateral. Both the amount of money borrowed and the type 28
Object Description
Title |
Pros and cons of a credit society |
Author |
Carlson, Cynthia |
Subject |
Credit |
Abstract | Illustration not included in Web version |
Citation |
Tempo, Vol. 23, no. 1 (1977), p. 28-31 |
Date-Issued | 1977 |
Source | Originally published by: Touche Ross, & Co. |
Rights | Copyright and permission to republish held by: Deloitte |
Type | Text |
Format | PDF page image with corrected OCR scanned at 400 dpi |
Collection | Deloitte Digital Collection |
Digital Publisher | University of Mississippi Library. Accounting Collection |
Date-Digitally Created | 2010 |
Language | eng |
Identifier | Tempo_1977_Spring-p28-31e |