The history of credit cards
Credit cards are such a part of our daily financial life that it’s hard to imagine a time before they existed. Today, there are over a billion credit cards in the United States, and about 70% of Americans have at least one card.
It hasn’t always been that way. Learn about the history of credit cards – how and why they started, the main reasons for their growth and the future of cards in the digital age.
When did retail credit start?
The precursors of today’s credit cards were introduced in the 1950s, but the history of consumer credit agreements goes back much further.
In the early 1900s, department stores, such as Macy’s and Wanamaker’s, were issuing paper or brass tokens to their best customers, says Lendol Calder, professor of history at Augustana College in Rock Island, Ill. . Customers could present the token to a clerk, walk out of the store with an item, and complete payment by the end of the month.
Richer customers often preferred not to use cash for their purchases, Calder says. “The credit transaction was born out of this service mentality.”
In 1929, a third of retail sales were financed. Credit sales made up about half of the total sales of the stores that offered it, according to Bob Hunt, associate director of the Consumer Finance Institute at the Federal Reserve of Philadelphia, in his working paper “A Century of Consumer Credit Reporting in America” . Oil companies and hotel chains have also entered into credit agreements for customers.
“Before credit cards, there was retail and merchant credit,” says Hunt. “It was a two-way relationship between the buyer and the seller. The trader carried and financed the loan and assumed the credit risk. The merchant bore the costs of collection and record keeping.
When were the first credit cards developed?
Credit cards appeared after World War II, when a boom in consumer spending prompted banks and retailers to find more options for the daily financial needs of American families. In the early 1950s, the amount of installment loans increased by about 700%, according to Joe Nocera in his book “A Piece of the Action: How the Middle Class Joined the Money Class”. Banks saw a lot of these deals as people borrowed small funds to pay for home appliances, back-to-school items, and vacation needs.
The first credit card is generally considered the Diners Club Card, which originated in 1950 in New York City. The card (it was just cardboard at the time) gained ground and grew to 10,000 members in the first year, with 28 restaurants and two hotels participating. It was not a traditional credit card, however, as the balance had to be paid monthly.
In 1951, the Franklin National Bank in Long Island, New York, issued the first card that most closely resembles today’s general purpose cards. For the first time, customers could purchase items and pay them off quickly or be charged interest if the debt was deferred. Participating merchants had to pay a fee for each card purchase.
In 1952, approximately 28,000 customers and 750 businesses subscribed to the card. The concept began to spread the same year, when a Michigan bank authorized Franklin’s credit card program.
In 1958, American Express responded to the entertainment and travel needs of its customers by launching its first payment card. Members were billed by American Express, and the company also collected a service fee from merchants who accepted the card. The card also became the first plastic payment card in 1959, and others followed soon after.
But during those early years, the cards were still only available in a few select markets.
“Banks were reluctant to get into this type of credit because they didn’t think it would be profitable,” Calder explains.
How credit cards went national
The national credit card market we are used to today – including national processing companies like Visa and Mastercard and banks that offer cards that can be used just about anywhere – dates back to the late years. 1950.
Bank of America’s 1958 launch of its BankAmericard credit card was legendary. The California bank decided that the best way to showcase its new product was to send massive mailings of the card to anyone doing business with the bank in various cities. According to Nocera, the bank put about 2 million cards into circulation and 20,000 merchants signed up, but the launch cost Bank of America millions of dollars in fraud. Payment defaults – which occurred in about 22% of accounts – were also well above expectations.
“It was the Old West in the beginning,” Calder says. “It was so bad that legislation was passed nationwide to prevent credit card companies from issuing credit cards to someone who had not applied for one.”
More and more banks became interested in credit cards in the 1960s, including some that authorized the name BankAmericard. Mass mailings continued until the practice was banned in 1970.
While businesses may have been hesitant to pay fees of 2% or more per charge, Calder says they have learned that customers will buy more on credit than with cash. “During this time, customers had to be convinced that it was a good idea to buy with a credit card rather than cash,” he says. “Attitudes towards debt have changed a lot since the turn of the 20th century, but there was still suspicion behind, especially about a universal credit card.”
But progress continued, and in 1966 a group of banks launched Master Charge (now Mastercard). Four years later, the banks that authorized BankAmericard created what eventually became Visa.
“Most credit card lenders have issued cards to consumers in relatively small geographic areas,” Hunt said. “The march towards a concentrated national market of credit card issuers took place over a 30-year period beginning in the 1970s.”
Federal laws such as the Fair Credit Billing Act and the Truth in Lending Act essentially establish almost uniform rules on credit cards, making it easier to create a national product, says Hunt. Additionally, 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 have realized that consumers don’t really care about interest rates,” Calder said. “You can charge for pretty much anything you want, and the consumer won’t really notice.”
Exponential growth of credit cards
Credit card issuers discovered that they could make money not just on fees charged to merchants. Customers who haven’t paid their debts immediately could also be a great source of income.
“They’re going to make their money on people who hold a revolving balance and pay interest – that’s what banks figured out in the 1980s,” Calder says.
Some of the growth in credit cards can be attributed to the widening income gap that began in the early 1970s and continues today, Calder says. Middle-class families could thrive on a single income in the 1960s, but that began to not be the case in the 1970s.
“Now consumers need more access to credit,” Calder says. “The credit card had a huge advantage over previous versions of credit like installment credit, and people flocked to it.”
Retail cards – like those in department stores – were the most commonly held cards in the early 1970s. Bank-issued cards exploded in popularity in the decades to come. Only 16% of American families had a bank card in 1970, compared to more than two-thirds in 1998, according to Federal Reserve surveys of consumer finances.
While card issuers couldn’t mail consumers’ credit cards without asking after 1970, they still marketed their cards aggressively. For example, the number of mailed requests reached more than 5 billion in 2001, a five-fold increase from 10 years earlier.
These marketing arguments often trumpeted changes that made credit cards more attractive in a competitive market, including: rewards and travel services, retailer discounts, cash back programs, low introductory rates and little or no balance transfers charged.
“Another big development in the late 1990s was the pricing of credit cards based on risk,” says Hunt. “Before that time, almost all credit cards had the same interest rate, and credit cards were only available to consumers with very clean credit reports. The combination of saturation of the main part of the credit card market, the availability of credit scoring and the recent automation of credit bureaus have led lenders to offer credit cards to the riskiest consumers. ”
The future of credit cards
The credit card market has stabilized recently for several reasons, according to Hunt, including rising student debt, market saturation and debt concerns following the 2008-09 financial crisis.
“The credit card market hasn’t grown much over the past 10 years,” he says. “As a proportion of all debt, it has actually gone down.”
Consumers also have more options. Debit cards, which withdraw funds directly from a bank account, have become more popular over the past 20 years, says Hunt. “As a result, consumers in the United States today make more purchases with debit cards than with credit cards.”
Consumers are also engaging more with fintech companies that can digitally provide loans, which Hunt says has also taken some balances off credit cards.
But credit cards are fully active in the digital world. Today, digital wallets can enable contactless payments or cardless payments, for example through a website or an app. In addition, the increase in online shopping has resulted in faster growth of cardless transactions than in-store transactions, says Hunt.
Credit cards have been around for 70 years. Chances are they will be a part of our financial life for the next 70 years as well.