The form of credit extended to individual borrowers is known as “consumer credit” and entails a lending of funds or services to be repaid at another date. Common forms of consumer credit are credit cards, loans, and mortgages. Although credit lending has existed for centuries, our current credit structure dates back to the institution of installment plans in the mid-1800s. Stores began selling consumer products, such as sewing machines, furniture, and large household appliances on credit and collected payment and interest in smaller installments over a longer period of time.
Nowadays, credit lending is partially regulated by the creditworthiness of the individual consumer, based on credit scores. Most Lenders use the FICO scoring system, developed in 1989, which determines a consumer’s ability to repay funds and the likelihood that they will do so based on credit history. A credit history is a record of previous borrowing activity, including repayment, late payments, defaulted loans, and bankruptcy filings. Many credit-based services require between one year and eighteen months worth of credit history before determining creditworthiness, and credit scores are often not available if the consumer’s credit history is very short. Although there are fees for obtaining a credit report, every U.S. citizen is entitled to a free credit report once a year.
Managing Your Credit Doesn’t Have to Be a Crisis
The key factor in America’s economic downturn is the collective problem of overspending. According to the most recent Federal Reserve Consumer Report, the average credit card debt for a household of 2.5 is roughly $8000 a year. Most Americans are living beyond their financial means, a habit that is enabled by easy access to credit.
Contrary to what the government has lately reported, America has experienced ongoing financial decline for years. The recent collapse of our most powerful financial institutions has certainly affected the flow of money in the upper reaches of our economic hierarchy, but middle class America has been in the midst of increasing financial woes since well before the new millennium.