Financial Know-How

Introduction to Credit

You hear a lot about debt these days. You probably have student loan debt; you might have credit card debt. Your family may have a mortgage and a car loan or two. And yet, with all this debt, nobody is really talking about the difference between different debts.

For the most part, there are two types of debt. Installment Debt is essentially a debt that is established generally as a lump sum and is paid off at set amounts with a fixed schedule. This includes mortgages, car notes, and student loans; debts that have a timetable for payment. Revolving Debt involves a series of payments based on the loan’s current balance; a figure which can fluctuate as more money is loaned for purchases. Revolving debt is made up almost entirely of credit cards.

There are numerous differences between the two, but the largest of these is the set nature of the payments. Installment debt generally has fixed payments and a fixed loan amount, so over time your payments stay the same and your balance continually goes down. Revolving debts can have variable payments and the amount of debt can go up or down depending on your spending habits – over time you could owe more and have larger payments. While it can be easy to see the benefits of an installment debt, such as home ownership or a college education, it may be trickier to see the benefits of a revolving debt.

It is important to objectively look at some of these Positives and Negatives of credit cards. On average, 83% of college students have credit cards, so it is important to understand what credit cards are all about by taking a quick look at the history of credit, how credit is used, and some more ways credit differs from other debts, such as student loans.

History of Credit Cards

People have been using "Credit", the idea of paying later for a purchase now, for thousands of years, with evidence of credit being used dating as far back as Babylonia. Early American shopkeepers would use a ledger to keep track of which customers were currently paying off an expensive item, such as a washing machine or car part. It wasn’t until the beginning of the 20th century that companies and stores began giving their customers an easily identifiable item to mark their individual account.

Before World War II, some of these companies began to allow customers to use this credit at other establishments, setting the stage for the system we use today. Many of these were "Charge Cards" rather than "Credit Cards" as the individuals would have to pay all of their charges at the end of the month.