Credit cards are like this The ubiquitous part of our daily financial life, it is hard to imagine before they came into existence. Today, there are over 1 billion credit cards in the US, and about 70% of Americans own at least one card.
It was not always like this. Find out the history of credit cards – how and why they started, the main reason for their development, and the future of cards in the digital age.
When did retail credit start?
The pioneers of today’s credit cards were introduced in the 1950s, but the history of the consumer credit system dates back much further.
In the early 1900s, major department stores such as Macy’s and Wanamaker issued paper or brass tokens to their best customers, says Lendol Calder, a history professor at Augustana College in Illinois. Customers can present a token to a clerk, walk out of the store with an item, and pay by the end of the month.
Wealthier customers often prefer not to use cash for purchases, Calder says. “The credit operation evolved from that service mentality.”
In 1929, one-third of retail sales were financed. Credit sales constituted nearly half of the total sales for stores, according to Bob Hunt, associate director of the Consumer Finance Institute at the Philadelphia Federal Reserve, in his working paper “A Century of Consumer Credit Reporting in America”. Oil companies and hotel chains also arranged loans for customers.
“Before credit cards, there was retailer and merchant credit,” Hunt says. “It was a bilateral relationship between buyer and seller. The merchant borne and financed the loan and bore the debt risk. The merchant incurred the costs of collection and record keeping.”
When were credit cards first developed?
Credit cards appeared after World War II, when consumer spending prompted banks and retailers to find more options for the everyday financial needs of American families. In the early 1950s, he appeared in his book “A Piece of the Action: How the Middle Class the Money Class.” Banks saw plenty of that business, as people borrowed small funds to pay for equipment, back-to-school goods, and holiday needs.
The first credit card is usually considered the Diners Club Card, which began in 1950 in New York City. The card (it was cardboard now) was caught and grew to 10,000 members in the first year, with 28 restaurants and two hotels participating. This was not a traditional credit card, however, the balance had to be paid every month.
In 1951, Franklin National Bank in Long Island, New York, issued the first card that resembles today’s common-use card. For the first time, customers can buy items and if they repay the loan, they will have to pay the interest or pay it quickly. Participating merchants had to pay a fee for each card purchase.
By 1952, approximately 28,000 customers and 750 businesses signed up for the card. The concept began to spread the same year that a bank in Michigan licensed a charge card program from Franklin.
In 1958, American Express responded to the entertainment and travel needs of its customers by launching its first charge card. Members were charged by American Express, and the company also charged service fees from merchants who accepted the card. The card became the first plastic charge card in 1959, and others soon followed.
But in those early years, cards were still available only in select markets.
“Banks were reluctant to go into such credit because they didn’t think it would be profitable,” Calder says.
How credit card national went
The national credit card market that we are using today – including national processing companies such as Visa and MasterCard, and banks that offer cards that can be used anywhere – has its roots in the late 1950s.
Bank of America’s launch of its BankAmericard credit card in 1958 was legendary. California Bank decided the best way to introduce its new product was to send the mass mail of the card to anyone who does business with the bank in various cities. According to Nocera, the bank placed around 2 million cards in circulation and 20,000 merchants signed on, but the launch bank spent millions of dollars in fraud. The delay – which occurred in about 22% of accounts – exceeded expectations.
“It was early in the Wild West,” Calder says. “It was so bad that a national-level law was passed to prevent credit card companies from issuing credit cards to anyone that nobody asked for.”
In the 1960s, more banks became interested in credit cards, with some obtaining a license named BankAmericard. The mass interaction continued until this practice was repealed in 1970.
Even though businesses have paid a fee of 2% or more per charge, Calder says they learned that customers will buy more on credit than they would with cash. “Meanwhile, customers had to be convinced that it was better to buy with a credit card than cash.” “Attitudes towards debt had changed considerably since the early 20th century, but there was still little doubt, especially regarding a universal credit card.”
But progress continued and in 1966 a group of banks launched MasterCharge (today’s MasterCard). Four years later, banks that had licensed BankAmericard eventually became visas.
“Most credit card lenders issued cards to consumers in relatively small geographic positions,” Hunt says. “A concentrated national market of credit card issuers took place over a 30-year period in the 1970s.”
Hunt says federal laws such as the Fair Credit Billing Act and the Truth in Lending Act essentially set nearly identical rules about credit cards, making it easier to create a national product. In addition, a 1978 Supreme Court ruling allowed banks to charge interest rates based on the state where the bank was located, not the rate in the customer’s home state.
“This is important, because the curious thing about credit cards is that banks thought that consumers don’t really care about interest rates,” Calder says. “You can charge just about whatever you want and consumers won’t really notice.”
Exponential Credit Card Development
Credit card issuers found that they could not make money only on fees charged from merchants. Customers who did not pay their loans immediately may also be a major source of revenue.
“They are going to make their money to those who hold a revolving balance and pay interest – this is what banks pulled out in the 1980s,” Calder says.
Some of the credit card development can be attributed to the widening income gap in the early 1970s and continues to this day. Middle-class families could thrive on an income in the 1960s, but this did not happen in the 1970s.
“Now a consumer needs to increase access to credit,” Calder says. “Credit cards had great benefits in previous versions like installment credit, and people accomplished it.”
Retail-based cards – such as those from major department stores – were the most commonly held cards in the early 1970s. The popularity of bank issued cards exploded in the coming decades. According to the Federal Reserve’s Survey of Consumer Finance, only 16% of American households held a bank card in 1970, compared to more than two-thirds in 1998.
While card issuers could not match consumers’ credit cards after 1970, they aggressively marketed their cards. For example, the number of mailed solvents exceeded 5 billion in 2001, a five-fold increase from 10 years ago.
These marketing pitches often have changes that make credit cards more attractive in a competitive market, including: travel rewards and service, retailer discounts, cash back programs, low introductory rates and low or no-fee balance transfers.
“Another significant development in the late 1990s was risk-based pricing of credit cards,” Hunt says. “Prior to this time, almost all credit cards had the same interest rate, and credit cards were only available to consumers with very clean credit reports. A combination of saturation of the major share of the credit card market, availability of credit scoring. Model, and The recent automation at credit bureaus led lenders to offer credit cards to at-risk consumers. “
Credit card future
The credit card market has recently closed for a few reasons, Hunt says, including concerns about debt in the wake of student loan debt growth, market saturation, and the 2008–09 financial crisis.
“The credit card market has not grown much in the last 10 years,” he says. “As part of all the debt, it has actually fallen.”
Consumers have more options. Hunt says that debit cards, which deduct money directly from a bank account, have become more popular in the last 20 years. “As a result, American consumers today shop more on debit cards than they use credit cards.”
Consumers are also more attractive with financial technology companies that can provide loans digitally, which Hunt says has also taken away some balance from credit cards.
But credit cards are fully active in the digital world. Today, digital wallets can allow contactless payments or card-non-current payments, such as through a website or app. In addition, the rise in online shopping is making card-not-current transactions grow more rapidly, Hunt says.
Credit cards have been around for 70 years. It is a safe bet that they will be part of our financial life for the next 70 years.