Board’s “Household Debt Service and Financial Obligations Ratios” (2013).

According to the Federal Reserve Bank, in the first quarter of 2013, aggregate
consumer debt was $2.7 trillion. The 2013 consumer debt level is $.58 trillion,
above its trough of $2.12 trillion in the first quarter of 2004. These debt levels
include student loans, credit card debt, auto loans, and delinquencies.
Consumer credit and debt are integrated into societal consumption patterns in
the modern world.
Barbara Friedberg

See also: Bankruptcy; Budget; Credit Card; Debt; Debt Collection; Debt/Credit Coun​‐
seling; Delinquency; Interest Rates; Online Personal Finance; Rent to Own

Further Reading
Household Debt and Credit Report,” Federal Reserve Bank of New York, retrieved July
16, 2013. http://www.newyorkfed.org/householdcredit/
“Household Debt Service and Financial Obligations Ratios,” Federal Reserve Board,
last modified June 17, 2013. http://www.federalreserve.gov/releases/housedebt/

Credit Card
A credit card is a small plastic card issued by a bank, financial institution, or
merchant, which enables the cardholder to purchase goods and services with
borrowed funds. Interest on the amount of payment begins one month after
purchase. If the card user pays the amount owed within the first billing cycle, there
are no interest charges. Credit cards have higher interest rates (around 19 percent
per year) than most consumer loans.
Credit cards have become prevalent across all realms of both U.S. and
international developed markets. Unfortunately, their overuse can lead one to
accumulate excess debt and cause financial problems.

History
Lending money with a card began in the 1800s when store owners and agricultural
enterprises in conjunction with financial institutions offered credit. By the
beginning of the 1900s hotels and large department stores created paper “charge”
cards for their important customers. These designated “creditworthy” customers

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used the cards in the issuing merchant’s store in the same way consumers use credit
cards today with a predetermined upper credit limit.
Sears was one of the first companies to use a credit card to increase sales and
the strategy worked very well. Long before the Internet, Americans received a
Sears Catalog with pictures of toys, tools, tractors, and every kind of household
product sold in the Sears stores. With the innovation of credit cards, people could
buy anything they wanted from Sears immediately—and pay for it later with
interest.
General-purpose, as opposed to store-based, credit cards began in 1949 when
Diners Club created their nationwide network card. Cardholders could charge
goods and services from network members. Diners Club cards, initially designed
for wealthy individuals to pay for entertainment and travel expenses, became
successful. In spite of the 7 percent fee charged to merchants by Diners Club, the
vendors enjoyed greater spending from card users than from those who paid with
cash.
As with most successful concepts, Diners Club inspired many competitors. By
the late 1950s, Bank of America jumped into the credit card business with a
national card. At that time, interstate banking laws prohibited banks from operating
outside of state borders. Creatively, Bank of America circumvented the interstate
banking laws with the credit card and reached a large national customer network.
As the national network grew more complex, Bank of America separated its credit
card business into what is now known as the Visa network.
In 1966 the MasterCard network emerged to compete with Visa. The credit
card industry continues to grow with extensive competition for consumers. Today,
according to Akers et al. (2005), most Americans as well as members of
developing countries hold at least one credit card. In 2001 approximately 76
percent of families had a credit card. Today, 92 percent of families with incomes
over $30,000 have a credit card with the average for all households reaching 6.3
cards.

How Do Credit Cards Work?

To obtain a credit card a consumer completes an application, and the issuing
company does a quick “credit check” to determine the applicant’s ability to make
the credit card payments. If the credit card company believes the applicant can
repay the borrowed funds, then a credit card is issued with an upper spending
limit.

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 The credit card is a plastic card with the customer’s name and account numbers
on the front. The account numbers, specific to each cardholder, apply to the credit
card’s network, bank, and account. On the back there is a signature box, partial
account number, and a three- or four-digit card identification security number along
with a magnetic code strip.
This is how a college student might get his first credit card: Joachim completes
a credit card application and the issuing company checks his credit and possibly
his work history. If Joachim has a part-time job and is attending college, the bank
will likely approve him for a credit card. Since his income is low, the card might
have an upper limit of $800. That means Joachim can make purchases up to $800.
Those with higher incomes and greater credit histories usually receive higher
credit limits.
Every month, the cardholder receives a statement via mail or online with the
list of purchases, fees, and the amount owed along with the due date for payment. If
the full balance of the card is paid off every month, no interest fees are charged. If
a partial payment is made on the bill, interest begins to accrue or build up. If the
consumer continues to pay only part of the total bill, more interest accrues, and
eventually the individual ends up owing a lot more money than he initially charged.

Advantages and Disadvantages of Credit Cards

Credit cards are convenient as they eliminate the need to carry cash. Using a credit
card responsibly can help the consumer build a credit history. A good credit history
is important if one wants to borrow money to buy a home or car. Some credit card
companies protect the cardholder from false charges in case the card is stolen and
do not hold the cardholder responsible for most of the charges made by the thief.
Many credit cards also offer rewards such as cash back, airline miles, or gift
cards. Using a credit card is also a method of keeping track of expenses.
Credit cards allow consumers the opportunity to buy more than they can pay off
in one month. This is both an advantage and a disadvantage. The advantage is that it
boosts the consumer’s spending power and can serve as a help during times of
unexpected expenses. The disadvantage of buying more than one can pay off in a
month means that the consumer pays a very high interest rate on the unpaid credit
card balance.
A major disadvantage of credit cards is that they make it easy to incur large
amounts of debt. For example, some consumers charge a lot over the holiday
season and end up paying the bills months after the holiday festivities are over.

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 Many merchants such as hotels and rental car companies require consumers to
have a credit card on file in order to rent a car or stay at a hotel. This is a
disadvantage if the consumer doesn’t have a credit card.
In short, using a credit card responsibly by paying off the balance every month
is a convenience. Let the balance build up for many months and the convenience is
converted into a serious financial disadvantage.
Barbara Friedberg

See also: Cash; Credit Report and Reporting Agencies; Credit Score; Debt; Interest In​‐
come and Payments; Year 2010: Dodd-Frank Wall Street Reform and Consumer
Protection Act

Further Reading
Akers, Douglas, Jay Golter, Brian Lamm, and Martha Solt. Federal Deposit Insurance
Corporation Web site. “FDIC Banking Review; Overview of Recent Developments
in the Credit Card Industry.” Updated November 1, 2005.
http://www.fdic.gov/bank/analytical/banking/2005nov/article2.html

Credit (or Bond) Rating Agency

In the finance world, it’s important for investors to trust institutions that issue
bonds and fixed-income debt. After all, if an individual or institutional investor
purchases a 30-year bond for $1,000, which promises to pay a 5 percent coupon or
interest rate, the investor must be certain that the issuer will be solvent and
available to make the interest payments for the next 30 years.

The Rating Agencies’ Contributions to the Year 2007–2008 Subprime

Housing Crisis and Mortgage Meltdown
The rating agencies were deemed to be above reproach. The rating grade accuracy, up
until recently, was not questioned. Yet, during the financial crisis of 2007, the rating
agencies were accused of and subsequently settled major lawsuits over their inaccurate
ratings.
For the first time ever, S&P and Moody’s settled suits claiming that investors had been
misled by their ratings. Since 2008, the legal firm of Robbins Geller Rudman & Dowd had
fought a $700 million fraud and negligence claim against the rating agencies. The firm
ultimately settled for $225 million with a group of institutional plaintiffs that included King
County, Washington, and the Abu Dhabi Commercial Bank. The legal suits accused the

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