The Credit Card System In Consumer Societies

The concept of credit is as old as Man himself. Since the dawn of civilization, people have borrowed money in order to purchase goods or hire services for which they were not able to pay at that moment. In return, they promised to repay their debt in the future and pay the lending agent a fee for his service. In modern day language that means that a financial institution grants a loan to its client and expects that loan to be repaid with interest within a specified period of time. Until the 1970s, those loans were made for a specific purpose, like buying or building a house (where the credit is called a mortgage) or financing the purchase of a new car. The object for the loan was then taken as a collateral to ensure that the lending institution got back its money.

The credit card industry began to develop in the late 1970s, changing completely the way banks grant credit by making it available to huge numbers of people. No collateral is required when applying for a credit card. Instead, the banks look at the trustworthiness of its clients by checking their past behavior when borrowing money, which is called their credit history. This and the amount of fixed income the client has determines the credit line, the amount of money the client can borrow from his bank on a monthly basis through the use of his credit card.

Today it is not only banks that extend credit to large numbers of qualifying individuals. Many retail institutions like department store chains offer their customers their own credit cards in order to turn them into loyal clients. Nowadays consumers can buy nearly everything from groceries to clothes or book a holiday by using what has come to be called plastic money.

In consumer societies, for example the United States or Japan, buying goods on credit and paying for them later has become the norm. In fact, the granting of credit by financial institutions to individuals through the use of credit cards has become the engine for the whole economy. Societies that operate exclusively on a cash basis tend to be more conservative and its members tend to think more carefully before spending their money. However, the lending of money generates more economic activities and therefore creates more jobs and more wealth. This has to be based on the premise that the financial institutions grant their credit wisely to responsible consumers.

Banks and financial institutions, in general, are not government agencies or charities, but are companies that are in the business of making profits for themselves. They do that through various means such as the annual fee they charge the credit card holder, even if he never uses the card, the fees the merchants have to pay to the bank for the privilege of being able to accept credit cards in their stores, thus attracting more clients and the interest they charge the credit card holder for the credit itself.

But there is a risk as well that the financial institution runs when issuing credit cards to its clients. It may lose money when people default on their account, i.e. they do not repay all the money they have spent using their card. Or the bank may lose money when its customers do not use this particular financial instrument enough so that the profits generated are not sufficient to cover the cost of the operation of the whole credit card system.