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Heathen is a term originally derived from "dwelling on the heath", meaning rural people. Its meaning came to be similar to that of "pagan" (which also shares a similar origin, meaning a country dweller), in that they both became pejoratives for those who continued to persist in "the old ways" after the "civilized" city dwellers had converted to Christianity.
Its origin and usage as a pejorative is similar to the usage today of terms like "redneck" and "hick" for rural people, but with an almost opposite religious connotation.
Fundamentalist religion nowadays is (unfairly or not) thought to be strongest among rural people and freethought strongest among urban people; however, during the period immediately following conversion of the European nations to Christianity, the religion took hold in the cities long before it did in the country. "Heathen" and "pagan" implied the rural people were the "rednecks" of their day, but also the free thinkers of their day, persisting in disbelief (although often believing in a variety of archaic folk religions and superstitions). The assumption was that Christianity was a civilizing force and the "heathens" were yet uncivilized.
 Modern usage
The term persists today, though increasingly in ironic or sarcastic usage, to refer to sinners and unbelievers. It is also favored as a self-referential term by some neopagans, usually those following a Germanic, Norse, or Old English variety of neopaganism who favor "heathen" over "pagan" because of the former term's related origin and etymology.