Thursday, March 05, 2009

Managing Credit

One of the topics in my personal finance course (FINM1401) is Managing Credit. Yesterday I finally got around to listening to the recent EconTalk podcast about credit and bankruptcy. Russ Roberts interviews law professor Todd Zywicki about the history of credit and bankruptcy law in the US. The first half of the interview, about credit, is very relevant; the parts about US bankruptcy law, while quite interesting, are not so relevant here in Australia.

Of particular interest were the following points:
  • Before the rise of the credit card in the 1960s, credit was extended by sellers of durable goods (white goods, cars, etc.) through installment loans which allow payments to be extended over a fixed period of time. Credit was also extended by pawn shops and payday lenders. Therefore, it is difficult to compare the level of household debt today with levels 50+ years ago.
  • The separation of credit provision from sales of durable goods made credit cheaper and allowed manufacturers to compete more transparently on price and features. Price is often obscured when credit is extended by the seller, as interest may not be explicitly stated.
  • With the current credit crisis we're seeing a resurgence of some of these older methods of finance -- pawn shops, payday lenders, buying goods on installment loans. These often cost much more than credit card debt. Lay-away (Lay-by), where customers pay over time before receiving the product, is also becoming more common.

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