Consumer credit may seem like a fairly new invention – but it’s actually been around for more than 5,000 years!
In fact, many millennia before the credit score became ubiquitous, there is historical evidence that cultures around the world were borrowing for various reasons. From the writings in Hammurabi’s Code to the exchanges documented by the Ancient Romans, we know that credit was used for purposes such as getting enough silver to buy a property or for agricultural loans made to farmers.
Consumer Credit: 3,500 B.C. to Today
In today’s infographic from Equifax, we look at the long history of consumer credit – everything from the earliest writings of antiquity to the modern credit boom that started in the 20th century.
Consumer credit has evolved considerably from the early days.
Over the course of several millennia, there have been credit booms, game-changing innovations, and even periods such as the Dark Ages when the practice of charging interest (also known as “usury”) was considered immoral by some people.
A Timeline of Consumer Credit
Below is a timeline of the significant events that have helped lead to the modern consumer credit boom, in which Americans now have over $12.4 trillion borrowed through mortgages, credit cards, student loans, auto loans, and other types of credit.
The Ancients and Credit
3,500 BC – Sumer
Sumer was the first urban civilization – with about 89% of its population living in cities. It is thought that here consumer loans, used for agricultural purposes, were first used.
1,800 BC – Babylon
The Code of Hammurabi was written, formalizing the first known laws around credit. Hammurabi established the maximum interest rates that could be used legally: 33.3% per year on loans of grain, and 20% per year on loans of silver. To be valid, loans had to be witnessed by a public official and recorded as a contract.
50 BC – The Roman Republic
Around this time, Cicero noted that his neighbor bought 625 acres of land for 11.5 million sesterces.
Did this person literally carry 11.5 tons of coins through the streets of Rome? No, it was done through credit and paper. Cicero writes “nomina facit, negotium conficit” – or, “he uses credit to complete the purchase”.
Moral Concerns About Lending
800 – The Dark Ages in Europe
After the collapse of the Western Roman Empire, economic activity grinded to a halt. The Church even banned usury, the practice of charging interest on loans, for all laymen under Charlemagne’s rule (768-814 AD).
1500 – The Age of Discovery
As European explorers and merchants begin trade missions to faraway lands, the need for capital and credit increases.
1545 – England
After the Reformation, the first country to establish a legal rate of interest was England in 1545 during the reign of Henry VIII. The rate was set at 10%.
1787 – England
Philosopher Jeremy Bentham writes a treatise called “A Defense of Usury”, arguing that restrictions on interest rates harm the ability to raise capital for innovation. If risky, new ventures cannot be funded, then growth becomes limited.
The Birth of Modern Consumer Credit
1803 – England
Credit reporting itself originated in England in the early 19th century. The earliest available account is that of a group of English tailors that came together to swap information on customers who failed to settle their debts.
1826 – England
The Manchester Guardian Society is formed, and later begins issuing a monthly newsletter with information about people who fail to pay their debts.
1841 – New York
The Mercantile Agency is founded, and starts systemizing rumors about the character and assets held by debtors through a network of correspondents. Massive ledgers in New York City are made, though these reports were heavily subjective and biased.
1864 – New York
The Mercantile Agency is renamed the R. G. Dun and Company on the eve of the Civil War, and finalizes an alphanumeric system for tracking creditworthiness of companies that would remain in use until the twentieth century.
1899 – Atlanta
The Retail Credit Company was founded, and begins compiling an extensive list of creditworthy customers. Later on, the company would change its name to Equifax. Today, it is the oldest of the three major credit agencies today in the United States.
The Consumer Credit Boom
1908 – Detroit
Henry Ford’s Model T makes automobiles accessible to the “great multitude” of people, but they were still too expensive to buy with cash for most families.
1919 – Detroit
GM solves this problem by loaning consumers the money they need to buy a new car. General Motors Acceptance Corporation (GMAC) is founded and popularizes the idea of installment plan financing. Consumers can now get a new car with just a 35% downpayment at time of financing.
1930 – United States
By this time, efficient U.S. factories are pumping out cheaper consumer products and appliances. Following the lead of GM, now washing machines, furniture, refrigerators, phonographs, and radios can be bought on installment plans. It’s also worth noting that in this period, 2/3 of all autos are bought on installment plans.
The First in Big Data
1950 – United States
By 1950, typical middle-class Americans already had revolving credit accounts at different merchants. Maintaining several different cards and monthly payments was inconvenient, and created a new opportunity.
At the same time, Diners Club introduces their charge card, which helps open the floodgates for other consumer credit products.
1955 – United States
Early credit reporters use millions of index cards, sorted in a massive filing system, to keep track of consumers around the country. To get the latest information, agencies would scour local newspapers for notices of arrests, promotions, marriages, and deaths, attaching this information to individual credit files.
1958 – United States
BankAmericard (now Visa) is “dropped” in Fresno, California. American Express and Mastercard soon follow, offering Americans general credit for a wide range of purchases.
1960 – United States
At a time when the technology was limited to filing cabinets, the postage meter, and the telephone, American credit bureaus issued 60 million credit reports in a single year.
1964– United States
The Association of Credit Bureaus in the U.S. conducts the first studies into the application of computer technologies to credit reporting. Accuracy of data is also improved around this time by standardizing credit application forms.
1970 – United States
The first Fair Credit Reporting Act is passed in the United States. It establishes a standard legal framework for credit reporting agencies.
1980s – United States
The three biggest credit bureaus attain universal coverage across the country.
1989 – United States
The FICO score is introduced, and quickly becomes a standard system to measure credit scores based on objective factors and data.
2006 – United States
VantageScore is created through a joint-venture between the top three credit scoring agencies. This new consumer credit-scoring model is used by 10% of the market, and 6 of the 10 largest banks use VantageScore.
The Information Age has enabled a new era in consumer credit and assessing risk – and today, credit reports are used to inform decisions about housing, employment, insurance, and the cost of utilities.
Learn more about how data, the internet, and modern computing is changing credit in Part 2 of this series.
Visualizing the Snowball of Government Debt
See the latest levels of government debt, based on the IMF’s most recent data. Where does your country sit in the snowball?
Visualizing the Snowball of Government Debt
Over the last five years, markets have pushed concerns about debt under the rug.
While economic growth and record-low interest rates have made it easy to service existing government debt, it’s also created a situation where government debt has grown in to over $63 trillion in absolute terms.
The global economic tide can change fast, and in the event of a recession or rapidly rising interest rates, debt levels could come back into the spotlight very quickly.
The Debt Snowball
Today’s visualization comes to us from HowMuch.net and it rolls the world’s countries into a “snowball” of government debt, colored and arranged by debt-to-GDP ratios. The data itself comes from the IMF’s most recent October 2018 update.
The structure of the visualization is apt, because debt can accumulate in an unsustainable way if governments are not proactive. This situation can create a vicious cycle, where mounting debt can start hampering growth, making the debt ultimately harder to pay off.
Here are the countries with the most debt on the books:
|Rank||Country||Debt-to-GDP Ratio (2017)|
Note: Small economies (GDP under $10 billion) are excluded in this table, such as Cabo Verde and Barbados
Japan and Greece are the most indebted countries in the world, with debt-to-GDP ratios of 237.6% and 181.8% respectively. Meanwhile, the United States sits in the #8 spot with a 105.2% ratio, and recent Treasury estimates putting the national debt at $22 trillion.
On the opposite spectrum, here are the 10 jurisdictions that have incurred less debt relative to the size of their economies:
|Rank||Country||Debt-to-GDP Ratio (2017)|
|#2||Hong Kong (SAR)||0.1%|
Note: Small economies (GDP under $10 billion) are excluded in this table, such as Timor-Leste and Solomon Islands
Macao and Hong Kong – both special administrative regions (SARs) in China – have virtually zero debt on the books, while the official country with the lowest debt is Brunei (2.8%).
How Technology is Shaping the Future of Consumer Credit
Massive amounts of data, the use of biometrics, the fintech boom, and neural networks are just some trends shaping the future of consumer credit.
Consumer credit has been constantly evolving for more than 5,000 years, but the reality is that the most drastic changes to the industry came fairly recently.
Modern credit systems are now powered by sophisticated algorithmic credit scoring, the use of trended and alternative data, and innovative fintech applications. While these developments are all interesting in their own right, together they serve as a technological foundation for a much more profound shift in consumer credit in the coming years.
The Future of Consumer Credit
In today’s infographic from Equifax, we look at the cutting edge of consumer credit, including the new technologies and global trends that are shaping the future of how consumers around the world will access credit.
It’s the final piece of our three-part series covering the past, present, and future of credit.
The biggest problem that creditors have always faced is well-documented. There is more to a borrower than just their credit score. Yet creditors do not always have a 360 degree view of a consumer’s creditworthiness in order to better assess their overall score.
Called “information asymmetry”, this gap has gotten smaller over the years thanks to advancements in technology and business practices. However, it still persists in particular situations, like when a college student has no credit history, or when a rural farmer in India wants to take out a loan to buy seeds for crops.
But thanks to growing amounts of data – as well as the technology to make use of that data – high levels of information asymmetry may soon be a thing of the past.
Forces Shaping Credit’s Future
Here are some of the major forces that will drive the future of consumer credit, addressing the information asymmetry problem and making a wide variety of credit products available to the public:
1. Growing Data
90% of the data in all of human history has been created in just the last two years.
2. Changing Regulatory Landscape
New international regulations are putting personal data back in the hands of consumers, who can control the personal data they authorize access to.
3. Game-changing Technologies
Machine learning, deep learning, and neural networks are giving companies a way to garner insights from data.
4. Focus on Identity
Authenticating the identity of consumers will become crucial as credit becomes increasingly digital. Blockchain and biometrics could play a role.
5. The Fintech Boom
The democratization of data and tech is allowing small and niche players to come in and offer new, innovative products to consumers.
The Credit Revolution
No one can predict the future, but the above forces are shaping the credit industry to be a very different experience for consumers and businesses. Here are how things could change.
More Data, New Models
Current credit scoring algorithms use logistical regressions to compute scores, but these really max out at using 30-50 variables. In addition, these models can’t “learn” new things like AI can.
However, with new technologies and an unprecedented explosion in data taking place, it means that this noise can be converted into insights that could help increase trust in the credit marketplace. New algorithms will be multivariate, and they will be able to mine, structure, weight, and use this treasure trove of data.
|Artificial intelligence||Machine learning can “learn” from massive data sets, and apply these lessons for better scoring.|
|Bayesian||Models can update probabilities as more information is available, helping to better predict creditworthiness.|
|APIs||Application programming interfaces (APIs) make it easier for developers to use technologies, data, and to build new applications.|
|Neural networks||Brain-inspired AI systems designed to replicate the way that humans learn are used for deep learning. This enables the processing of raw, unstructured, and often abstract data for new insights.|
Neural networks will be able to look at a billions of data points to find and make sense of extremely rare patterns. They will also be able to explain why a particular decision was made – and at a time where transparency is crucial, this will be key.
Data Will be in the Hands of Consumers
Today, much of consumers’ financial data – such as loan repayment histories – is held almost exclusively by banks and credit agencies.
However, tomorrow points to a very different paradigm: much of the data will be directly in the hands of consumers. In other words, consumers will be able to decide how their data gets used, and for what. In Europe, changes have already been made to transfer control of personal data to the consumer, such as the PSD2, GDPR, and Open Banking (U.K.) initiatives.
Experts see the trend towards open data growing globally, and eventually reaching the United States. Open data will allow consumers to:
- Regain control of checking, mortgage, loan, and credit card data
- Give up more information voluntarily to unlock better deals from creditors
- Grant access to third parties (fintech, apps, etc.) to use this data in new applications and products
- Gain access to better rates, new lending models, and more
Identity Will Be Just as Important
As transactions become more digital and remote, how lenders verify the identity of borrowers will be just as important as the lending data itself.
Why? Credit is based around trust – and fraud is the biggest risk for lenders.
But fraud an be prevented by new technologies that help detect anomalies and prove a borrower’s identity:
Distributed, tamper-resistant databases can help secure people’s identities from fraudulent activity
Fingerprints, facial recognition, and other biometric identification schemes could help secure identities as well
New Game, New Players
With the vast expansion in types and volume credit data, new technologies, and standardized data in the hands of consumers, there will be a new era of third-party companies and apps that can provide useful and relevant services for consumers.
Here are just some emerging fields in lending:
|P2P Loans||Does a bank need to be an intermediary?
With peer-to-peer loans, you are matched to an appropriate lender/borrower.
|Microlending||Lending doesn’t always need to be in big amounts, like for a mortgage or auto loan.|
|Alternative credit scoring||Psychometric testing or the use of other data streams can be used to power this less traditional form of lending.|
|Niche services||With an open playing field, companies will fill every gap imaginable.|
In the future, consumers may not have to even request credit – it may be automatically allocated to them based on behavior, age, assets, and needs.
Consumers will have more control, and more options than ever before.
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