The history of credit stretches back longer than you might think. While credit cards and modern mortgages are 20th century inventions, credit has actually been around longer than cold hard cash. Loans and debt have been one of the building blocks – and biggest challenges – faced by human civilizations since the start of history.
We at Debt Help BC have put together this brief history of debt, which traces how it’s evolved into its modern forms, and how modern forms of debt relief have taken shape into the processes you can now use to get debt free.
Early History: 3500 BC
According to David Graeber, author of Debt: The First 5000 Years, the earliest expense accounts, tabs, and even compounded interest rates date all the way back to 3500 BC, thousands of years before the first coins were ever minted.
One of the most common ways to keep track was through wooden tally sticks. Notches were made into the wood to tally up money owed and paid. The stick would be broken in half, one half kept by the creditor and one half by the debtor, and they could even circulate between different people.
For much of human history, credit worked well because most settlements were small enough that you knew all of your neighbours. As civilizations and human economies became more complex, currency became more prevalent, and later on more complex credit systems evolved to meet new needs.
Ancient Debt Relief
Ancient Mesopotamian civilizations like Babylon and Sumer regularly issued general amnesties as an early form of debt relief to commoners. Going into debt back then meant losing property and even your freedom. As a result, many people would flee to the point that they threatened a social breakdown, so general debt relief was used to maintain order.
In ancient Rome and Greece, governments were less likely to issue debt forgiveness to the whole population. As a result, governments repeatedly faced insurrections from indebted citizens.
The Middle Ages: 800 to 1500 AD
In medieval Europe, the Catholic Church prohibited usury, i.e., charging interest on a loan. This considerably hampered economic development until the Renaissance, when trade began to increase, and merchants needed credit to supply ships. By 1545, England set a legal interest rate of 10% to help fund riskier ventures. Credit became increasingly common, opening the path for the modern credit system centuries later.
Modern Credit: 1800s to Today
Starting in the 19th century, credit started to become more available to everyday people, and the first credit reporting system evolved. The first recorded credit reporting was done by a group of tailors in England (since clothing would often be purchased on credit), who would swap information about customers who did not settle their debts. By 1899, the Retail Credit Company was founded in Atlanta to compile extensive lists of creditworthy consumers. The company is now known as Equifax.
By the 20th century, credit began to boom, starting with car loans and mortgages. By the 1940s and ’50s, numerous “charge cards” appeared like the Diner’s Card. While you could make purchases without cash, you had to settle the bill at the end of each month. But in 1958, the Bank of America introduced the first true credit card that offered revolving credit, allowing consumers to carry a balance with interest.
Bankruptcy and Consumer Proposals
As long as there has been credit, there’s been a need to get help with your debt when it becomes too much. The first bankruptcy law as we now understand it – in which the debtor can voluntarily file for bankruptcy and receive debt forgiveness – was passed in the United States in 1841, although it would not become permanent until 1898.
Today, bankruptcy isn’t the only option if you have more debts than you can ever repay. In the 1990s, the Canadian government amended the Bankruptcy and Insolvency Act to create consumer proposals. A consumer proposal provides a procedure in which individuals can restructure their debts in a way similar to what businesses could already do.
The creation of the consumer proposal allowed individuals to enjoy some debt forgiveness, relief from interest charges and collection actions, and repay their creditors over time without surrendering any of their assets. For consumers earning an income and with some equity or investments, consumer proposals created an avenue for them to get debt relief they needed without giving up hard-earned assets.
How a Consumer Proposal Works
As an alternative to bankruptcy, consumer proposals have been growing in popularity. A licensed insolvency trustee starts by looking at your total unsecured debts compared to your income and expenses. They then propose a restructured payment plan to your creditors, who take a vote. Unlike other non-bankruptcy alternatives, a consumer proposal is binding for all unsecured creditors if the majority (weighed by how much you owe to each) votes in favour of the proposal.
The proposal is based around how much you can afford to repay each month. A consumer proposal can last up to five years, and the difference between five years of monthly payments and what you currently owe is forgiven as part of the deal. Creditors will often accept a fair proposal because they can usually recoup more of their loans than they can in a bankruptcy, while the debtor gets to keep equity and assets that they might have to part with in a bankruptcy.
Use our Debt Repayment Calculator to calculate how soon you can become debt free, and find an estimate of the monthly payments it will take to get there using a consumer proposal, credit counselling, debt consolidation, and paying as you are now. Comparing these four options allows you to make a quick assessment on your own, but you will get more detailed answers specific to your financial situation when you book an initial consultation with us.
We want you to have the answers to all your debt-related questions. As long as there has been debt, there have also been forms of debt relief. Talk to a Licensed Insolvency Trustee to find out how to avoid bankruptcy with a consumer proposal.