Credit [begin strikethrough]cash[end strikethrough] is king.

Author:Price, John

The expansion of credit has dramatically altered the consumer landscape in Latin America over the last decade. Going back a bit further, in 1990, fewer than 3 percent of Latin American households had a credit card. By 2020, that figure will grow to 25 percent. In Brazil, where credit has grown even more radically, consumer loans expanded eight fold from 2002 to 2012.

Access to credit changes how consumers shop. Credit enables people to buy larger ticket items that would otherwise be out of reach.

When Mexico's Telmex began offering Acer computer packages to its landline customers in 1998, it instantly became the largest computer re-seller and doubled Mexican PC and laptop demand from 1 million to 2 million units per year. Most of Telmex's customers could not obtain a credit card at the time, so the opportunity to pay for a computer through installments on their monthly phone bill was irresistible, even if the interest rate used to calculate the installments was set at loan-shark levels. The Telmex example illustrates how consumer credit, even unconventional and costly sources of credit, can unleash repressed demand for expensive but vital goods.

Over the last decade, Brazilian software sales have jumped 671 percent, car sales have grown by 561 percent, and appliance sales have leapt 521 percent, all faster than GDP or general consumption growth.

In Latin America, credit card interest rates are onerous, ranging from 30 percent to 230 percent per year. The banks defend the rates based on the high costs associated with collecting unsecured debt. High interest rates limit the use of cards. Latin Americans generally do not buy groceries, medicine, clothing and other staples with a credit card. Plastic is reserved for big ticket and extraordinary expenses. High interest rates also provoke prudent balance management. Default rates in Latin America are about half the levels found in the United States. Even while growing, consumer credit in Latin America represents no more than 70 percent of total GDP, versus 230 percent in the United States.


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