What is Bank Credit
Credit is usually understood to mean allowing the customer to pay for something over a period of time while using the item which is purchased on credit. Credit is actually a form of (usually short-term) loan. A society that is dependent upon credit for purchase of luxuries or even necessities is one in which even a slight fluctuation of interest rates can have catastrophic effects.
The granting of credit used to be done because you knew the person to whom it was being granted. In an agricultural economy, farmers were extended credit to purchase the seeds and fertilizer needed to plant the crop and payment was due when the crop was harvested. Unfortunately, the bank often required the collateral of the farm itself so that if the loan was not repaid, the home and business of the farmer was forfeited. Often, the general store in the small community had to wait for the crop to come in as well.
Company towns were notorious for providing credit to the workers. Credit for housing, food, clothing which ate up all the paycheck of the workers was provided by the company, making the workers better than indentured servants.
For most Americans, credit was asked for and approved for major items like automobiles, houses and furniture. Everything else was purchased on layaway or with cash or checks from current earnings. Then came the boom in credit cards. The convenience of having a small piece of plastic in your wallet with which you could purchase things like clothing, stereo equipment, televisions, and even food and drink gradually became the norm rather than the exception. Credit cards were mailed out by credit card companies and banks by the thousands, even millions. People didn’t even have to apply, just sign on the approval form and instantly have hundreds of dollars of credit available for purchases.
The costs of using these credit cards tended to go higher and higher, with annual fees and double digit interest rates, penalties and service charges for each transactions adding to the pain when the customer realized that payments for the interest portion of the credit card was higher than for the purchase of the item itself.
A collapse was imminent, and actually occurred about the same time as the savings and loan credit debacle. Hopefully there were some credit lessons learned that will stay with both credit recipients and creditors. Still, a way of life that includes enjoy now and pay later has a great deal of appeal to many people.
by Nathan.Smarty 19 years ago