The Economy: 12. Credit

This BBC podcast is supported by ads outside the UK.

You compare flights, hotels, even coffee shops.

So, why not travel insurance?

Insure My Trip lets you compare top plans side by side.

No bias, no pressure.

Lost bags, flight delays, medical drama abroad?

Covered.

It's powered by smart tech, real reviews, and expert help when you need it.

Think of it like a travel-savvy friend who actually reads the fine print.

With 20-plus years of experience and an 8-plus BPB rating, we've got your back.

Risk less, travel more.

Start comparing at insuremytrip.com.

That's insuremytrip.com.

When disaster takes control of your life, ServePro helps you take it back.

ServePro shows up faster to any size disaster to make things right.

Starting with a single call, that's all.

Because the number one name in cleanup and restoration has the scale and the expertise to get you back up to speed quicker than you ever thought possible.

So whenever never thought this would happen actually happens, ServePro's got you.

Call 1-800-SURFPRO or visit SurfPro.com today to help make it like it never even happened.

BBC Sounds, music, radio, podcasts.

Welcome to Understand the Economy, the podcast that takes you back to basics to explain, explore, unpick, and elaborate on how economics affects our everyday lives.

We have covered all sorts of big economic concepts in previous episodes, from interest rates to bonds and inflation to recessions.

It is definitely worth catching them on BBC Sounds because those big money stories have a huge impact on all of us.

But it cuts both ways.

Collectively, our individual financial decisions have a big impact on what the wider economy does.

And that includes how we manage our own money, like what we buy and how we buy it.

And one way we make large purchases, purchases, smooth out big bills and sometimes just spend some cash we can't afford is credit.

And that's what we're looking at in this episode.

To unravel it all for us, I'm joined by Professor John Gathergood, Professor of Economics at the University of Nottingham.

John, hello.

Hi, nice to meet you.

Thank you for joining us.

What is credit?

So people use credit when they want to buy something today and the money isn't available to them today, but it will be in the future.

And so it's a way to borrow to allow you to buy whatever that product or service is that you need now.

And essentially what you're doing when you use credit is you're spending tomorrow's money today.

I love digging into where these words come from.

The origin of the word credit, you have to go way back.

It essentially means to trust, which makes sense, doesn't it?

If something is credible, then we believe it.

Absolutely.

It's a trust.

It's an IOU.

And credit in one form or another has existed for centuries.

There are different types of credit, retail credit, consumer credit.

What's the difference?

We could think about the traditional forms of credit.

So think of the credit card or the personal loan.

We call those consumer credit.

And a feature of those products is that you need to apply for the product before you decide to go and buy something.

Retail credit is different in that retail credit allows you to access credit in the act of buying something.

So that's where you might be on a website online that offers buy now, pay later.

And sometimes from several different lenders, you can see them all kind of there below the pay now button.

So what is buy now, pay later?

Because I think for a lot of people, this is quite a new concept.

It is quite new and it does exactly what it says on the tin in that it allows you to buy something now and pay later.

So it's quite an attractive product to have.

In a way,

you could think that maybe all of us should use buy now, pay later because they don't charge you any interest and it allows you to spread out your payments and pay later.

So that's why it's really taken off as an exceptionally popular product.

Now, loans, of course, are a lot more rigid, I suppose.

Explain to us how a payday loan works.

It's very different to the credit card example.

In this case, you are borrowing a fixed amount of money and that money is due back in a number of installments.

and there'll be a fixed amount of money due to be paid back each month.

Something we really need to dig into when we're talking about credit is compounding.

It doesn't sound scary, but it's something we really need to know about.

So if you borrow money and you pay interest on the amount that you've borrowed, if that money then isn't repaid, the next time the interest gets applied, say the next month or the next year, you'll be paying interest not just on the amount that you've borrowed, but on the interest that was applied in the first month or year when you borrowed the money.

You might think, well, if it's only 5% interest, then I borrowed £100 and so I pay £5,

that's 5% interest.

And so the next time,

say the next year, then they're going to apply another £5,

5% on the £100,

but they're also going to put £5% on the £5

interest.

That's the compounding bit.

If you let that carry on, then the debt that you owe will actually grow what we call exponentially.

That means to say it will grow very quickly and actually balloon upwards.

And so compounding, although it might not sound like a big deal, if the debts are allowed to grow, it can very rapidly become an extremely large value.

It feels at times like it's much easier to borrow money now, even compared to just a few years ago.

Of course, there's two sides to this.

With Buy Now Pay Later, it's interest-free.

It's very attractive.

It doesn't cost you anything as such.

And so you could think about lots of purchases where it might be really helpful to buy it now, but spread the payments over three months.

Let's say I've going on holiday and I'm paying for a flight.

There's this idea of fly now, pay later.

It's quite a big expense.

We love it when it rhymes.

Fly now, pay later.

We love it when it rhymes.

It's quite a big expense.

It could be a few thousand pounds, you know, for a...

a long-haul flight and you just spread it out over say three months that's really helpful but the other side the flip side of buying now pay later is it is credit it's interest free but it is credit and so there's always this maybe temptation to be a bit too optimistic about how much money you might have later or maybe there's desperation and you can get in a situation where you've bought now but you can't pay later and that's where these products can be potentially damaging to consumers and whether it's optimism or desperation we've actually been buying now and paying later throughout history Here's our resident economic historian, Dr.

Victoria Bateman of Cambridge University.

The Taliman was a door-to-door salesman who traveled around the country selling all kinds of goodies.

And his origins really go all the way back to the 12th century when the Pac-Man sprung to life, walking from village to village, accompanied by a swag bag or a cart, filled with everything from spoons to toys.

In the 19th century, as cloth manufacture boomed thanks to the Industrial Revolution, the majority of what the Tallyman sold was clothes, and the majority of his customers were female, mostly in low-income neighbourhoods.

Increasingly, the Tallyman offered credit and even developed a side business of doorstep lending.

To keep track, the Tallyman kept a tally book, where he recorded who bought and borrowed what and when their monthly payments were due.

The Tallyman got a bit of a bad reputation for both hard selling and for offering credit on rather expensive terms.

All too many of his customers ended up in county court.

for not making their repayments and in response the government was forced to act.

So in 1927, they introduced the Moneylenders Act, which effectively limited the interest that customers could be charged to no more than 48% a year.

John, it's interesting we have all these examples of historic retail credit, isn't it?

I mean, for a very long time, you've been able to, say, buy things on a tab in a local shop and getting a tab, that is just retail credit.

Absolutely.

And essentially, retail credit is a very simple device.

You would go into a shop historically and you would put your product to service, whatever you'd bought on a tab.

Now, that is what modern buy now, pay later essentially is.

If we don't pay our loans, if we don't clear our overdrafts, if we end up stuck in persistent debt and can't repay it, that is obviously very bad just on an individual basis.

It's also bad for our creditors, isn't it?

If they don't get paid the interest they were expecting or maybe even the money they originally lent back, we have, to avoid that, a really sophisticated system that tells lenders if we're likely to actually pay them back.

Tell me about credit scores.

Everybody in the UK has some history of using financial services.

Maybe it's just a bank account.

But you've got some history there of the products that you've used and whether you've repaid on time or not.

Now that information from all those products and services that includes things like mobile phones and your utility payments is put together by companies into what's called a credit file.

It's a file of data about how you've used credit in the past.

And that information is provided to the companies from which you might go and borrow, say, today.

If I look like someone who has perpetually failed to pay their debts, then the company is going to consider me to be a bad risk and most likely decline my application.

And does that take away the risk for banks and for other lenders?

Well, it reduces the risk.

It doesn't eliminate the risk because I might historically have been really good at paying my debts.

It doesn't mean that something bad isn't going to happen to me tomorrow, such that I can't be paying my next loan.

Well, easy-click credit for online retailers feels like a new phenomenon, but you're very right.

We've shopped this way for a very long time.

It's not that much different to a young woman called Mavis back in 1936.

Here's Dr.

Victoria Bateman again.

In 1936, as the British economy was emerging from the Great Depression, Mavis Knight, a 19-year-old Londoner from Finsbury Park, married her sweetheart.

While the newly married couple bought their furniture on higher purchase, their wedding outfits, including Mavis's all-important wedding dress, came from the Taliban.

Mavis would regularly escape from the grit of daily life through visits to the cinema, and a silver screen influenced what she chose.

Many of the items in her wardrobe came from the Taliman, and she made regular repayments of about six pence a week.

While she liked fashion, Mavis was practical rather than frivolous.

So instead of opting for a white wedding dress, she chose a brown one so that she could continue to wear it while making her repayments well into her married life.

So Mavis is 19.

Is she quite young to be borrowing all that money?

Well you could think that, but actually borrowing can make more sense for younger people.

Because younger people have rising incomes as they take on jobs and get promoted.

It makes less sense for say retired people to borrow because they're on fixed incomes and they don't have as long to repay.

Oh that's interesting.

So is it good for businesses and for growth if we all have easy access to credit?

I think it's good for business and growth if we have appropriate access to credit.

But it has to be very controlled.

I can't borrow £3 billion to start my own space programme, unfortunately, sadly.

That might be a great idea.

You could discuss with a few lenders.

We'll have to see how that one goes.

Well, I've not really thought past what colour I would paint the rockets, but it would be a very good space programme.

But I can't get that because I don't have the expertise and I don't have any capital to invest in that myself.

Maybe the space programme isn't going to quite happen, but you do see

me, John.

Well, maybe it is.

But you do see examples in recent decades where there has been too much credit and things have gone very, very wrong.

So, the financial crisis of 2007-08 and the following Great Recession was essentially a story, mostly in the United States, of people who couldn't afford mortgages being granted mortgage credit to come by houses.

And then those loans went bad, the houses got repossessed, the house prices fell in the US.

And the problem there was that that didn't just happen to a few people, that happened to millions of properties and it created a big global recession.

Loose lending costs economies.

It can do.

John, is it a good thing for the economy if people keep borrowing to keep buying?

In general, if individuals are able to keep spending, then what we call consumer spending in the economy is strong and that's really important for GDP.

GDP, of course, gross domestic product, essentially the value of everything that we do and make and sell as a country.

Absolutely.

But it really does come back to the individual.

If our incomes weren't looking great in the future and we all went out and splurged on buying goods and services, we're just storing that betrothal.

It's good for the economy if we can go and spend, but we need to spend in ways that are going to be sustainable.

John Gathergood, Professor of Economics at the University of Nottingham, thank you very much.

Well, credit is a powerful tool.

It can help grow the economy and it can help all of us manage our finances, whether we're Mavis in 1936 or someone buying a car in 2023.

If it's not used with care and managed with caution, it can have dramatic consequences.

It can capsize an individual's finances and that can ripple out and as we saw in 2008 it can sink the global economy.

Remember to subscribe to our podcast, Understand the Economy.

It's available now on BBC Sounds and get in touch as well.

We would love to hear from you.

You can use the hashtag understand the economy on social media.

Understand the Economy was presented by me, Felicity Hanna, produced by Louise Clark Robotham.

The researcher is Beth Ashmead Latham, and the editor is Claire Fordham.

It was mixed by Nikki Edwards.

When disaster takes control of your life, ServePro helps you take it back.

ServePro shows up faster to any size disaster to make things right, starting with a single call, that's all.

Because the number one name in cleanup and restoration has the scale and the expertise to get you back up to speed quicker than you ever thought possible.

So whenever never thought this would happen actually happens, SurfPro's got you.

Call 1-800SERVPRO or visit SurfPro.com today to help make it like it never even happened.

Sups!

The new musical has made Tony award-winning history on Broadway.

We demand to be home.

Winner, best score.

We demand to be seen.

Winner, best book.

We demand to be quality.

It's a theatrical masterpiece that's thrilling, inspiring, dazzlingly entertaining, and unquestionably the most emotionally stirring musical this season.

Suffs!

Playing the Orpheum Theater October 22nd through November 9th.

Tickets at BroadwaySF.com.