A notable change in consumer financial services over the past few decades has been the growth of the use of credit cards, both for payments and as sources of revolving credit. From modest origins in the 1950s as a convenient way for the relatively well-to-do to settle restaurant and department store purchases without carrying cash, credit cards have become a ubiquitous financial product held by households in all economic strata.
In modern commerce, credit cards (along with debit cards) serve as a payment device in lieu of cash or checks for millions of routine purchases as well as for many transactions that would otherwise be inconvenient, or perhaps impossible (for example, making retail purchases by telephone or over the Internet). Credit cards have also become the primary source of unsecured open-end revolving credit, and they have largely replaced the installment-purchase plans that were important to the sales volume at many retail stores in earlier decades.
Along with most major societal changes come questions about whether the trend is beneficial or detrimental (or somewhere in between), and the rise of plastic cards for payments and open-end credit is no exception. Credit cards certainly are widely used and accepted by the public. But they have also raised concerns in two areas: (1) whether consumers fully understand the costs and implications of using credit cards (the consumer information-consumer understanding concern) and (2) whether credit cards have encouraged widespread overindebtedness, particularly among those least able to pay (the indebtedness-financial distress concern). The two issues are related, because one result of lack of understanding may be overindebtedness. Both issues remain prominent in public discourse, as debt and personal bankruptcy levels have increased over the decades and media reports of confused consumers have multiplied.
Although one can usually find anecdotes to illustrate a point--consumers who are unaware of the costs of credit cards, for instance, or consumers who overspend because of the wide availability of credit--such examples can never lead to a definitive understanding of issues having broad social or economic impact. Statistically representative surveys can contribute to a more complete understanding of consumers' experiences. Taken together, such surveys can serve as a status report on the use of credit cards some fifty years after their introduction. This article brings to the discussion some survey evidence on the use of credit cards in the United States. It begins with an examination of long-term trends in consumer indebtedness, with attention to the growth of card-based credit. It then moves to an exploration of the consumer information-consumer understanding issue, with emphasis on consumers' attitudes toward credit cards and their knowledge of costs.
CREDIT CARDS AND INDEBTEDNESS
The Federal Reserve Board collects data on amounts of consumer credit outstanding, including amounts of revolving consumer credit, most of which is generated by credit cards.(1) Total (nonmortgage) consumer credit outstanding increased from $119 billion at year-end 1968 to $1,456 billion in June 2000 (in current dollars, not seasonally adjusted), while the revolving component grew from $2 billion to about $626 billion over the same period. Because population, income, employment, prices, and nearly every other economic indicator also rose over the period, the growth of consumer credit is often put in perspective by comparing it with the growth of consumers' income.
Total (nonmortgage) consumer credit outstanding (revolving and nonrevolving forms combined) has grown at approximately the same pace as disposable personal income over the past generation, although with noticeably more cyclicality. Since the mid-1960s, total consumer credit outstanding relative to this measure of income has fluctuated in a relatively narrow range of about 16 percent to 17 percent during or following recession periods to about 18 percent to 21 percent near business-cycle high-points (chart 1).
The revolving component of consumer credit has increased relative to income over the most recent three decades, and the nonrevolving component has decreased relative to income. Thus, the revolving component's share has been growing relative to the nonrevolving component's share, reflecting consumer preference and technological change; many consumers seem to like the convenience associated with prearranged lines of credit, and technological developments have made it much easier for creditors to offer this data-intensive product. A substantial portion of the new revolving credit probably has merely replaced credit generated by the installment-purchase plans that were common at appliance, furniture, and other durable goods stores in the past. And some of the new credit is in the form of "convenience credit" on credit cards--amounts that will be paid in full upon receipt of the monthly statement. (Installment-purchase plans have no equivalent "convenience" component.)
Card Holding among Families
Dollar amounts of credit card credit outstanding can be estimated from information provided by creditors, but only surveys of consumers can provide information about the users and uses of credit cards. For this reason, each Survey of Consumer Finances since 1970 has included questions on the holding and use of credit cards (the 1967 and 1968 surveys also included a few questions about credit cards).(2)
These surveys show that in 1998 almost three-fourths of American families had one or more credit cards, up from about one-half of a smaller population in 1970 (table 1). Among credit cards, the general-purpose cards that have a revolving feature, referred to in this article as "bank-type" credit cards, show the most notable increase over the period.(3) In the early 1970s, limited-use cards issued by retail firms, usable only in the firm's stores, were the most commonly held type of credit card; bank-type cards were much less common. By 1995, however, the holding of bank-type cards was more common than the holding of retail store cards.
1. Prevalence of credit cards among U.S. families, selected years, 1970-98 Percent Item 1970 1977 1983 Have a card Any card(1) 51 63 65 Retail store card 45(2) 54 58 Bank-type card(3) 16 38 43 Have a card with a balance after the most recent payment Any card(1) 22 34 37 Retail store card 15 25 29 Bank-type card(3) 6 16 22 MEMO Families having any card with an outstanding balance after the most recent payment as a proportion of all families having cards 44 56 57 Families having a bank-type card with an outstanding balance after the most recent payment as a proportion of all families having bank-type cards 37 44 51 Proportion of families having a bank-type card who hardly ever pay revolving card balances in full ... 18 25 Item 1989 1995 1998 Have a card Any card(1) 70 74 73 Retail store card 61 58 50 Bank-type card(3) 56 66 68 Have a card with a balance after the most recent payment Any card(1) 40 44 42 Retail store card 28 24 19 Bank-type card(3) 29 37 37 MEMO Families having any card with an outstanding balance after the most recent payment as a proportion of all families having cards 57 59 58 Families having a bank-type card with an outstanding balance after the most recent payment as a proportion of all families having bank-type cards 52 56 55 Proportion of families having a bank-type card who hardly ever pay revolving card balances in full 26 28 27 NOTE. In 1970, families were asked about using credit cards in all other years, they were asked about having cards. (1.) Includes cards issued by banks, gasoline companies, retail stores and chains, travel and entertainment card companies (for example, American Express and Diners Clubs), and miscellaneous issuers (for example, car rental and airline companies). (2.) Data are for 1971. (3.) A bank-type card is a general-purpose credit card with a revolving feature; includes BankAmericard, Choice, Discover, MasterCard, Master Charge, Optima, and Visa, depending on year. ... Not available. SOURCE. Surveys of Consumer Finances.
The holding of bank-type credit cards has continued to grow in recent years, whereas the holding of retail store cards peaked about a decade ago and has fallen off since then. In fact, bank-type cards issued under the Visa and MasterCard brands are so widely held and used today that it is difficult to imagine that they were not especially common only three decades ago. Known at that time as BankAmericard and Master Charge, respectively, and issued only by commercial banking organizations, they were a new product in the mid-1960s and by 1970 together had reached only about one-sixth of families; the other major bank-type …