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What is Debt?
what is debt

What is Debt anyway? The concept of debt is not difficult to understand. You need something, you borrow it and you're in debt to the lender. When you give it back you're out of debt. If you borrowed a tool from a neighbor after giving it back you would have an obligation to lend something to your neighbor when he needed something. Of course if you didn't give it back your neighbor would come take it back and may even impose a penalty. Maybe they would refuse to lend things to you in the future and maybe they told others and gave you a bad name, or maybe they imposed some kind of physical punishment.

It's when we throw in the concept of adding interest to what you've borrowed that things get interesting. Now you borrow from a professional lender and pay them back more than you borrowed and if you don't, you pay a penalty in fees, late charges, over-the-limit charges and any other charges that they can come up with to increase what you owe. With interest rates lenders are currently charging, and with the way the charges are calculated, it's not unusual for a borrower to have to pay several times the amount borrowed just in interest. When you understand that many borrowers spend the money on things that have only short-term benefits like dining out or vacations and you can clearly see that they are paying for something long after the benefits are gone. Many people can't even remember what it was that they're still paying for.

The Beginning of Debt
beginning of debt

Debt has been around for hundreds of years, probably as long as there has been money. Debt has been a burden to many since then. In early Greece debt was physically tied to bondage, for if one was unable to repay their debts they simply became property of the lender. In his wisdom Solon, the great lawgiver, passed a law in 594 B.C. that outlawed debt bondage and canceled all outstanding debts. That was of course good news for those who owed money but not so for those who had lent it.

It was in the Italian banking system in the 1300's that modern lending got its start. Using a bill of exchange a bank could lend money, designate from among dozens of currencies and transport it safely over poorly guarded highways. Even if it was stolen it could not be cashed by the robber. Thus 100 gold coins in a bank in Venice could be used in Florence. The bill of exchange was then able to be used as currency among merchants and lenders, further increasing the value of the initial gold coins. This type of lending was only available to the merchants and the nobles, so ordinary workers were kept from the benefits and burdens of debt.

Debt in America - The Twentieth Century
Lending continued to be reserved for the upper class until fairly recently. Most middle-class and working-class people had no debt because the banks refused to lend them money. Most rented their homes and even if they did own a home it was paid for as it was being built. A middle class person in need of a loan only had the options of a pawn shop or a loan shark. The New York State Attorney General, in an attempt to curb loan sharking, put great pressure upon banks to make consumer loans available.

debt in america

In 1928 the National City Bank of New York offered loans with an interest rate of 12 percent to its working class customers. On the first day the bank received five hundred applications. Because of the interest rate and a low rate of default, the loans became a source of great profits for the bank.

During the Great Depression of the 1930's, the United States government encouraged banks and other institutions to lend money for modest homes and cars. To help achieve this end, the government backed and guaranteed low-interest loans. After World War II, government backed home loans became available for veterans. By the 1970's there were a half-dozen government agencies that guaranteed home loans. In 1989 the federal government guaranteed nearly 40 percent of all home mortgages. In addition to mortgages the government backed loans for education, to open a small business or operate a farm. With all the government programs and encouragement nothing had the impact on consumer debt like an event that happened in 1950, the birth of the credit card.

The Credit Card
credit card debt
It was 1950 when Frank McNamara of New York's Hamilton Credit Corporation came up the idea of giving affluent businessmen a convenient way to charge business-related expenses. The original Diners Club card was pasteboard with the customer's name on one side and a list of the twenty seven restaurants that accepted it on the other. The first plastic cards came out in 1955 creating a whole new way of monetary exchange.

American Express, the traveler's check company, began issuing cards in 1958 followed by The Bank of America and their BankAmericard. Because The Bank of America had California as its base of operation, the BankAmericard quickly became the most widely know card. Other smaller banks joined the BankAmericard system and the system continued to grow. In 1977 the card underwent a name change and became Visa. By the 1990's Visa was the largest credit card in use with nearly 400 million cards in circulation and more than 12 million businesses that accepted it.

In 1967, City Bank of New York issued the Everything card, the card that eventually became MasterCard. It was during the 1960's that the credit card took hold of the American consumer's pocketbook. The credit card freed people from the restraints of having to have money to buy something by allowing them to use money that they had not yet earned. By freeing their immediate constraints the credit card took a firm hold of the card user's future. And the future showed up in the form of a bill the next month and every month after. And by the mid 1990's the consumer debt in America surpassed $1 trillion dollars, much of it through the use of credit cards.

The Prestige of Credit Card
Debt American Express devised the class system in the credit card industry. The original card was purple and through its marketing it presented an image of membership, much like being a member of a private club. In a few years the purple card turned green and then became surpassed in image by its gold sibling in 1966. By the mid 1980's the platinum card was born and the image was complete. The working-class had their "plain" card, the middle-class carried gold and the upper-class purchased with platinum.

With this system in place, the credit card companies were able to give the consumer instant gratification and control just how much debt they would get into. With the consumer being lulled into buying just a little more than they could afford, the bills never quite got paid and the credit card companies continued to be paid month after month. In many cases the payments continued long after the product purchased ceased to have any value.

Not Even the Sky's the Limit
In the 1970's the credit card industry faced a crises. The credit card companies were faced with paying up to 20% for the money they borrowed but were prohibited by law from charging more than 12% for the money they lent out. Obviously this was a recipe for disaster. But they found, or more precisely, created a solution.

Banking regulations limited the amount of interest they could charge to the rate set by the state in which they were doing business. So banks with credit card divisions in New York were regulated by the New York law. But with an eye towards new opportunities many banks began courting South Dakota. With promises of new jobs, new tax revenues, and who knows what kinds of political contributions, it took just weeks for the laws of South Dakota to be changed to allow unlimited interest rates to be charged. Delaware, noticing the opportunity, soon changed its laws too.

Now with no limits on interest rates, credit card companies were poised for unprecedented profits. And the money began pouring in, into South Dakota and Delaware. Check your credit card statements to see where your money goes. (Utah has no limit, it has American Express - New Hampshire has no limit, it has Providian - Virginia has no limit, it has Capital One - Arizona has a 36% limit, it has Bank of America and Direct Merchants)

Make More by Charging Less
The next big advancement in credit card profits came in a brilliant move that allowed you to pay less. How does a credit card company make more by allowing you to pay less you ask? Well if you had been paying a minimum monthly payment of 5% of the balance due you paid $50 for every $1,000 you owed. But when the minimum monthly payment was cut to 2% you could now owe $2,500 and still pay just $50. But with a 2% payment you would owe the money for years and years, I mean decades and decades. You owed more money for longer periods of time and the credit card companies made more money. All conveniently packaged with the concept of 'easy terms' and 'monthly payments.' That is, easy money for them and endless monthly payments for you.

Are You Smiling Now?
With the limits on interest rates having been lifted and the minimum monthly payment being reduce the next advancement came in the form of a lawsuit, Smiley VS Citibank. The decision of this lawsuit allowed credit card companies to charge unlimited fees. As if unlimited interest wasn't enough! Fees soon went from $5.00 to $10.00 to $20.00 to, well, as I said there is no limit. Seeing revenues surge it was only natural to invent new fees.

How many fees does your credit card have? Late fee? Yes! Over the limit fee? Yes! Returned check fee? Yes! Is that all? How about the Universal default fee? It allows your interest rate to be raised because you were either late on a payment, any payment not just to your credit card company or because you have too much debt. So what's the cost of a bounced check or a late payment? If you figure it out you're probably not going to be confused with Smiley. But as credit card companies saw their revenues from fees double they sure were happy.

Where does that leave us now? The Current State of Debt


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Debt Calculator

See how long it will take for your debt to get paid off with one of these four options. We have listed a standard debt amount as a default on the debt calculator. You will need to enter your current personal or business debt amount below to see what your debt payoff amounts will reflect.

What's Best For You: Minimum Payments?

Debt Consolidation?

Credit Counseling? Debt Settlement?
Total Unsecured Debt $30,000.00 $30,000.00 $30,000.00 $30,000.00
Months To
Get Out Of Debt
430 60 60 36
Interest Rate 18.9 % 12 % 10-12% Ave None
Total Interest Paid $49,978.53 $10,040.01 $21,300.00 None
$900.00 $667.33 $855.00 $458.33
Total Cost
To Be Debt Free
$79,978.53 $40,040.01 $51,300.00 $16,500.00
Monthly Payments   Months To Get Out Of Debt   Total Cost To Be Debt Free
Minimum Payments Debt Consolidation Credit Counseling Debt Settlement
Enter Your Debt Information Here:
Your Total
Unsecured Debt:
Your Average
Interest Rate:
Months To
Be Debt Free:


PLEASE NOTE: This calculator gives you an estimate of how much it will cost you to get out of debt, how long it will take and how much your monthly payment may be with the different options to pay off your debt. Keep in mind "Minimum Payments" assumes you NEVER make any further purchases on your credit cards and the credit card companies NEVER raise the interest rate on your cards in the future from the rate calculated above. The "Debt Consolidation Loan" example is usually only possible when taking out an "equity line of credit" or "second mortgage", which involves securing your unsecured debt with your home. This is a very risky option for most people because the home could be foreclosed if you cannot make the payments.