A Brief Look At 5,500 Years Of Credit History

Historians believe that the Sumerians of ancient Mesopotamia (in modern-day Iraq) extended credit to farmers in the rough equivalent of a consumer loan. The time lag between buying seed and harvesting grains to sell required up-front resources — just as it does today.

The first laws regarding credit were established in Babylon in 1800 BC. The Code of Hammurabi established formal contract rules for loans and caps on interest rates — perhaps an early form of consumer protection. To be enforceable, loans required recording and witnessing by a public official. Interest rate ceilings were high: 33.3 percent annually on grains and 20 percent on silver.

The concept of credit and interest continued through the ages, with occasional detours. For example, during Charlemagne's rule in 768-814 AD, the charging of interest on loans was banned by the church.

As explorers sailed in search of new lands during the Age of Exploration, nations re-established the capital and credit capabilities necessary for expansion. In 1545, England became the first nation to establish a legal rate of interest (10 percent).

On the other side of the pond, America's consumer credit began to boom with technological advances — including the appearance of the automobile — in the early 1900s. The first auto loans appeared shortly thereafter. The General Motors Acceptance Corporation (GMAC) was founded in 1919 to provide auto financing and make auto ownership possible for more Americans.

Meanwhile, a few merchants (primarily oil companies and department stores) established their own cards for exclusive use at their facilities – effectively the beginning of today's store cards. The Diners Club Card followed in 1950, providing the first major credit card that could be used at multiple merchants.

The major credit card companies we know today followed through the 1950s. American Express claims the first plastic card in 1959 (earlier cards were cardboard or celluloid). During this period, the concept of today's revolving credit cards was born. The original Diners Club required that the bill be paid in full at the end of each month.

Lenders have always been interested in risk in order to set proper interest rates — if you can't properly assess risk, you won't be a lender for long. The origins of credit reporting go back to 1800s England, where the Manchester Guardian Society created a monthly newsletter noting people who didn't pay their bills.

Credit reporting expanded later in the century. In the mid-to-late 1860s, R.G. Dun and Company created a system to check the creditworthiness of companies, while the Retail Credit Company began a similar task with individual consumers. (You know the Retail Credit Company today as Equifax, one of the three major credit bureaus.)

Credit reporting reached another milestone in 1958 with the credit scoring system established by the Fair Isaac Corporation (FICO) scoring system – the first iteration of today's primary credit scoring system. This allowed credit reports to be distilled into a single number for ranking purposes.

From the Code of Hammurabi to the Cash Back of Discover, credit and credit reporting have been with us for thousands of years and will likely be around for as long as people inhabit the earth. If we manage to colonize another planet, rest assured credit will be available there as well. Our descendants may have to scour interplanetary interest rates to find the best deal.

Credit cards can be an effective way to manage money, improve credit, earn points, and travel with perks if used the right way. Benzinga's personal finance staff provides tips on using credit cards effectively.

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