Pros and cons of a credit society;

              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
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