It’s a Credit Economy

A growing number of people purchase products and services on credit—either with credit cards or by taking out other types of consumer loans. Americans borrow to buy cars and trucks and put less money down when they buy homes, as home prices escalate in many parts of the country.

But credit cards are the fastest growing form of consumer borrowing in the developed world. And they have the biggest impact on most consumers’ financial status.

Credit cards are used on a regular basis by more than 73 percent of American households, up from 16 percent in the 1970s. Most Americans have at least one general-purpose credit card these days, and more often they have two or three. By general-purpose, we mean a credit card not issued by a specific store or retail chain; these cards include Visa, MasterCard, Discover or American Express cards that can be used almost anywhere.

In 1999, American consumers charged about $1.2 trillion on their general-purpose credit cards. By 2003, that number had grown by about a third—to more than $1.5 trillion.

Specifically, American Express saw a 13 percent increase in cardholder spending from 2003 to 2002. And that business was increasingly profitable. According to the company, American Express Bank (AEB) reported net income for 2003 of $102 million, up 27 percent from $80 million the year prior.

Visa, the largest player in the general-purpose credit card market, generated around $3 trillion in card sales volume worldwide each year in the early 2000s. Even Diners Club, a relatively small player in the market, racked up gross sales volume of $31 billion in 2001.

And then there are so-called “captive cards”—credit cards issued by department stores, gas stations and specialty retailers. They account for something like half again the amount charged to the general-purpose cousins.

In theory, credit cards allow you to enjoy your purchases for as long as a month before you have to pay a dime—and it’s all interest-free. Or at least it would be interest-free, if people paid off their credit card balances in full each month. Most don’t.

According to Fair, Isaac & Co., which tracks consumers’ credit histories, about 10 percent of Americans have credit card balances that exceed $10,000. On the other hand, nearly half of the population is much more conservative, carrying a balance of less than $1,000. (You’ll read a lot about Fair, Isaac & Co.—called by the acronym “FICO” by people in the credit and banking industries—through the course of this book.)

Those balances generate a lot interest—money owed to the card companies by the card users. In some cases, the interest rates are as high as 23 percent. (However, the industry group Your Credit Card Companies notes that the average credit card interest rate was approximately 12.75 percent in 2003.)

Of course, credit cards aren’t the only kind of credit consumers use. According to FICO, the average consumer today has 11 credit “obligations.” Of those, seven are likely to be credit cards; the other four are likely to be installment loans—including auto, home and student loans.

If you add it all up, you find that 30 percent of Americans carry more than $10,000 of non-mortgage-related consumer debt. And credit cards are the biggest slice of that debt pie.

The good news: Most people pay their bills on time. FICO notes that fewer than 40 percent of consumers have ever been reported as 30 or more days late on a payment, and only 20 percent have ever been 60 or more days past due.

Next: Credit Keeps Getting Easier