A History of Credit Cards
The credit card industry is undergoing a major transformation in 2009 as a result of the Credit CARD Act and significant policy changes by issuers. Credit card loans are much more expensive as issuers make changes to bring in the most revenue possible through interest rates and fees.
This is not a new development but part of the evolution of credit cards. It is interesting to look back at the history of credit cards to understand the piece of plastic that has become the worldwide method of payment.
Until the 1950s, people paid cash for most products and services. There were a few local attempts at credit cards. Some individual stores and gas stations offered charge cards. A few major retailers and hotels offered credit to their most valuable customers. But carrying around multiple cardboard cards or paper identifications was cumbersome and inconvenient. These were useful only at one location or a limited geographic area. Early users liked the ease of purchasing with credit, but it took time for banks and retailers to develop a convenient system with widespread acceptance.
Now, fifty years later, credit cards are the primary form of payment and are accepted almost anywhere in the world—from McDonalds to the Internal Revenue Service, to paying your mortgage and most monthly bills.
According to the Federal Reserve, demand for credit increased with the growth of urbanization and mass production of consumer goods. One of the main limits of growth was the lack of sufficient information to judge the credit worthiness of a consumer, so many potential customers couldn’t get credit. This changed with the emergence of national credit reporting agencies. Credit agencies introduced a better assessment of risk that helped to make credit cards more widely available to all groups.
Here are some important dates and developments in the evolution of credit cards:
* In 1946, Jon Biggins of Flatbush National Bank of Brooklyn invented Charge-It, the first bank credit card between bank customers and merchants.
* In 1950, Diner’s Club was created as a charge card and became the first credit card that was widely used. Frank McNamara, a manager of a small loan company in New York, aimed this card as an easy form of payment for salesmen who used it for travel and to entertain clients. This was a new service and McNamara had to solicit subscribers and restaurants to participate. The cards were made of paper stock, and charged no interest. Cardholders paid a $3 annual fee, and the companies who accepted the card had to pay 7% per transaction. It soon became a nationwide network.
* In 1958, American Express offered its own charge card for travel and entertainment expenses. In 1959, it upgraded from cardboard cards and created the first credit card made of plastic.
* In 1959, the revolving balance was allowed. Cardholders no longer had to pay their bill in full at the end of each cycle.
* In 1966, Bank of America introduced the first general purpose card, the BankAmericard. Because of restrictions, banks could not operate across state lines. Despite this obstacle, Bank of America wanted to find a way to expand, so it licensed the BankAmericard to other banks outside its area of operation. Business grew and became complicated and difficult to manage. Bank of America spun off BankAmericard into a separate entity that became the Visa network (name change to Visa occurred in 1976).
* Success brought competition. In 1966, a national credit card issuing system was created when credit-issuing banks joined together to make the InterBank Card Association. This became MasterCard.
The bank card industry grew. Banks that issued cards had to choose to join either the Visa association or the MasterCard association. Later, banks were able to join both associations and offer both types of cards. Joining Visa or MasterCard associations offered standardization and a processing system that reduced the costs for banks and allowed for growth of the credit industry. The cost of credit card processing is complicated and expensive and is still criticized and challenged by retailers.
* In 1968, Congressional regulation of the credit card industry began with the Truth in Lending Act. This required issuers to disclose all terms and conditions. Later, Congress banned mass mailing of active credit cards to people who hadn’t requested it.
* In 1970, 16% of all families had a bank-type card. 37% of those families carried a balance. The mean balance was $839 (Federal Reserve).
* In 1978, the Supreme Court (Minneapolis v. First of Omaha Service Corporation) ruled that banks could charge any rate allowed in the bank’s home state and could charge this rate in any other state. Until then, banks could only charge up to the rate that was allowed in the cardholder’s home state. To take advantage of this change, major banks moved credit card operations to states like South Dakota and Delaware because they removed caps on interest.
Removing the interest cap gave issuers the opportunity to set rates as high as they wanted. This was a boost for banks because, at that time, the rate of inflation was higher than what they could charge for interest. This change transformed credit cards into a profitable business. At this time, issuers also added the clause that gave them permission to “change rates at any time, for any reason.”
According to a PBS story, the Secret History of Credit Cards, “between 1980 and 1990, the number of credit cards more than doubled, credit card spending increased more than five-fold and the average household credit card balance rose from $518 to nearly $2,700. With the cost of money sinking and average balances climbing, profits soared.”
* In 1980, President Carter struggled to find ways to tame inflation. One option was by placing a freeze on soliciting new credit card accounts. Credit card issuers took to this opportunity to add a $20 annual fee that was still in place long after the threat of inflation subsided. (PBS Secret History of Credit Cards)
* In 1980, Congress begins the deregulation of the banking industry by passing the Depository Institutions Deregulation and Monetary Control Act.
* In 1986, Discover, originally a part of the Sears Corporation, introduced its own credit card and created its own merchant network.
* In 1987, American Express, traditionally a charge card, issued cards allowing customers to carry a balance.
* In 1990, AT&T; entered the credit card market by offering a card that waived the annual fee for life under certain conditions. It was a sensation because if you paid off your balance each month, you could use the card for free. It received a significant response and competitors quickly offered cards with no annual fee. Previously, most cards charged a $25 annual fee with an interest rate of 18%.
* In the early 1990s, credit card issuers advanced beyond one-rate-fits-all offers and used credit scores and financial data to develop pricing and credit strategies. They set rates and limits based on computer assessments of an individual’s risk of default. The higher the risk, the higher the interest rate. This new data gave opportunities for innovations such as increased credit limits and decreased minimum payments.
* In 1996, the Supreme Court ruling (Smiley v. Citibank) ruled that fees should be included with the term interest, and could be whatever the bank’s home state would allow. This ruling provided the opportunity for issuers to charge more for fees and to create new fees, such as over-the-limit fees. This ruling also opened the door for punitive practices like the Universal Default clause.
* In 2007, 73% of all families carried a credit card and 46.1% of all families had a credit card balance. The mean balance for those carrying a balance was $7,300 (2007 Federal Reserve Survey of Consumer Finances).
* In December 2008, the Federal Reserv
e adopted credit card reforms that will begin on July 1, 2010.
* In May 2009, the Credit CARD Act passed. A few provisions started on Aug. 20, 2009. Most go into effect in February 2010.
• In 2009, FICO reports that credit card issuers cut limits for an estimated 58 million cardholders from April 2008 to April 2009..