Term Paper on "Rapid Rise of Credit Card Use"

Term Paper 4 pages (1199 words) Sources: 1+

[EXCERPT] . . . .

Credit Cards

The mid-1990s saw a widespread increase in the use of credit cards as a form of payment. This increase occurred across all income groups, as credit card companies competed for customers. It was therefore fairly easy for everyone, even though considered "high risk" clients, to obtain credit. This paper looks at the lingering effects of this easy availability of credit.

The first part of this paper looks at the rise in credit card use, and the reasons behind this increase. The next part then looks at how the availability of easy credit caused a fundamental shift in American tastes. In the conclusion, this paper evaluates how these trends could affect a consumer's purchasing power, the credit industry, as well as the national economy.

Credit history study conducted by economist Amanda King al has shown that when adjusted for inflation, the average consumer revolving credit rose from $291 to $812 (King). This represents an increase of 179% in borrowing. The increase gave rise to many alarmist reports in the media, as credit card companies were presented as wolves preying on innocent sheep/borrowers.

Previous research has suggested that only a small amount of credit-card holding households were responsible for the vast majority of credit card debt. Others have shown that as credit cards became more common forms of payment, average balances increased across the board. The fact that credit cards became more readily available in the early 1990s partly accounts for this phenomenon, and tends to support the latter conclusions (Bernthal). It is far more likely that all people are using credit cards more, rather than merely a fraction of American households.

Bernthal et al. attributes this increase in revolving debt to intense competition among lenders. There was therefore a strong incentive for lenders to extend loans to riskier households. In the 1980s, credit cards were seen as a status symbol, only acquired by those who had disposable income. By 1995, however, the average credit card holder had lower income and was more likely to be single. The average credit card holder was also more likely to rent rather than own their home, worked in a blue collar profession and often carried higher credit card balances. As the median family income dropped from $43,000 to $38,000 in 1995, the average unpaid credit card balance rose from $1,100 to $1,700. By 2005, Americans collectively owed $1 trillion in revolving debt (Bernthal et al.).

Further studies found that by 2000, credit card debt increased disproportionately among the population that is considered "poor" or "near poor." Compared to just 10 years ago, the median credit card balances owed by poorer households almost doubled (Kennickell, Starr-McCluer and Surette). These figures show that while credit card debt has not increased by a significant margin, there is a disproportionate increase among lower-income households.

In summary, the seeds of a debt crisis were sown in the early 1990s, with the increased availability of credit.

Competition among lending companies led to the issuing of credit cards to lower-income households. Additionally, much of the revolving credit card debt was used to purchase what are known as "lifestyle facilitators," such as cars and similar consumer goods. In a sense, the availability of credit further fueled the hyperconsumerism that continues to pervade American society.

Credit aftermath

The availability of credit further heralded a drive to "hyperconsumerism." Authors John de Graaf et al. use the term "affluenza" to describe this condition of rampant commercialism (3). Along with other symptoms such as rising debt and longer working hours, the authors believe that affluenza as a whole is akin to a disease that… READ MORE

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