It’s difficult to picture a period before credit cards because they are such an integral part of our daily financial lives. According to the most recent Experian data, there were approximately 530 million credit card accounts in the United States in 2022, an increase of roughly 32 million from the previous year. In addition, according to the Federal Reserve, 84% of individuals in 2021 possessed a credit card.
This is not how it always was. Discover the background of credit cards, including their origins, major drivers of expansion, and prospects for cards in the digital era.
Retail Credit: When Did It Start?
Although the 1950s saw the introduction of the forerunners to today’s credit cards, consumer credit agreements have a much longer history.
To reward its most loyal customers in the early 1900s, large department stores like Macy’s and Wanamaker’s gave out brass or paper tokens, according to Lendol Calder, a history professor at Augustana College in Rock Island, Illinois. Customers could take an item out of the store, show the clerk their token, and make their payment by the end of the month.
According to Calder, wealthy consumers frequently opted not to pay with cash. According to him, “the credit operation grew out of that service mentality.”
In 1929, financing made up one-third of all retail purchases. 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,” credit accounted for around half of all sales for businesses that offered it. Customers could also get credit from oil firms and lodging chains.
Retailer and merchant credit predated credit cards, according to Hunt. “Buyer and seller had a bilateral relationship in this case. The credit risk was assumed by the merchant, who also funded the loan. The cost of record-keeping and collections fell on the merchant.
What Year Did the First Credit Cards Come into Being?
After World War II, a surge in consumer spending prompted banks and merchants to look for new ways to meet American families’ basic financial demands. This is when credit cards were born.
In his book “A Piece of the Action: How the Middle Class Joined the Money Class,” Joe Nocera claims that by the early 1950s, the quantity of installment loans had soared by almost 700%. As customers borrowed money to pay for appliances, back-to-school supplies, and vacation necessities, banks saw a lot of activity in that area.
The Diners Club Card, which debuted in 1950 in New York City, is typically regarded as the first credit card. The card—which was only cardboard at the time—caught on and in its first year had 10,000 users, including 28 eateries and two hotels. But since the balance had to be paid off every month, it wasn’t a typical credit card.
The first card that most closely matches today’s general-use cards was issued by Franklin National Bank in Long Island, New York, in 1951. Consumers could now purchase goods and pay them off fast, or risk being charged interest if the obligation was carried over. For each card purchase, participating retailers had to pay a charge.
About 28,000 individuals and 750 companies had the card by 1952. When a bank in Michigan obtained a licence to use Franklin’s charge card programme, the idea began to catch on.
American Express introduced its first charge card in 1958 in response to the leisure and travel demands of its consumers. American Express billed members a fee in addition to getting a service fee from businesses that took the card.
In 1959, American Express became the first company to provide a plastic charge card; others quickly followed.
But during those early years, just a few markets still sold cards. According to Calder, “Banks were hesitant to enter this type of credit because they didn’t think it would be profitable.”
how credit cards were widely used
The late 1950s laid the foundation for the current national credit card system, which includes widely accepted bank cards and payment processors like Visa and Mastercard.
The renowned BankAmericard credit card was first introduced in 1958. The California bank determined that bulk mailings of the card to anyone who transacted business with the bank in a number of cities would be the most effective approach to market its product.
Nocera claims that although 20,000 retailers signed up and the bank distributed around 2 million cards, fraud cost Bank of America millions of dollars as a result of the launch. Delinquencies, which affected around 22% of accounts, were also far more than anticipated.
The early going was like the Wild West, according to Calder. A nationwide law was created to prohibit credit card firms from granting credit cards to anyone who hadn’t requested one since the situation was so terrible.
In the 1960s, other banks started to be interested in credit cards, including some that bought the rights to the BankAmericard name. Until the practise was forbidden in 1970, mass mailings were still being done.
Businesses may have objected to paying a fee of 2% or more for each charge, but according to Calder, they discovered that consumers will spend more on credit than they will with cash.
Customers had to be persuaded that using a credit card rather than cash was a smart move, he adds. Although attitudes towards debt had significantly evolved since the early 20th century, there was still lingering mistrust, particularly over a universal credit card.
However, advancements persisted, and in 1966 a group of banks founded Master Charge, which is today known as Mastercard. What finally became Visa was developed by the institutions that had licenced BankAmericard four years earlier.
“Most credit card lenders issued cards to consumers in relatively small geographies,” claims Hunt. “Over a 30-year period beginning in the 1970s, the march to a concentrated national market of credit card issuers occurred.”
According to Hunt, the creation of a national product was made simpler by federal regulations like the Fair Credit Billing Act and the Truth in Lending Act, which essentially established practically standard rules governing credit cards. In addition, a Supreme Court decision from 1978 permitted banks to base their interest rates on the state in which they were located rather than the rate in the customer’s home state.
“That’s important because the curious thing about credit cards is that banks figured out consumers don’t really care about interest rates,” adds Calder. “The consumer wouldn’t really care what you charged, you could pretty much charge whatever you want.”
Rapid Increase in Credit Card Use
Credit card companies discovered that they might profit from fees other than those paid by retailers. Customers who didn’t immediately pay back their loans might potentially be a fantastic source of income.
Banks discovered out how to profit from customers who retain rolling balances and pay interest in the 1980s, according to Calder.
According to Calder, the expanding wealth inequality that began in the early 1970s and is still present now can be partly blamed for the rise in credit card use. In the 1960s, middle-class families could get by on one salary, but things started to change in the 1970s.
Consumers now require easier access to financing, claims Calder. People attracted to the credit card because it offered a sizable advantage over earlier forms of credit like installment credit.
Early in the 1970s, the most popular credit cards were retail-based cards, such those from large department shops. In the years to come, the use of bank-issued cards soared. In 1970, only 16% of American families owned a bank card; by 1998, that number had increased to more than two-thirds, according to the Federal Reserve’s Surveys of Consumer Finances.
After 1970, credit card companies could no longer mail customers credit cards without their permission, yet they continued to aggressively sell their cards. For instance, more than 5 billion letter solicitations were sent out in 2001, a fivefold rise from just 10 years earlier.
These marketing messages frequently bragged about enhancements to credit cards that made them more desirable in a cutthroat market, such as travel rewards and services, store discounts, cash back programmes, low introductory rates, and low- or no-fee balance transfers.
The pricing of credit cards on the basis of risk was “another significant development in the late 1990s,” according to Hunt. “Prior to this time, the interest rates on practically all credit cards were the same, and people could only get credit cards if their credit reports were quite clean. The availability of credit scoring algorithms, the saturation of the prime credit card market, and recent automation at the credit bureaus all encouraged lenders to extend credit to more risky customers.
Credit Cards in the Future
According to Hunt, the credit card industry has lately stabilised due to a number of factors, including market saturation and worries about rising debt, particularly student loan debt.
“The credit card market has not grown much in the last 10 years,” he claims. It has actually decreased as a percentage of total debt.
Customers also have additional choices. In the past 20 years, debit cards—which draw money directly from a bank account—have grown in popularity, according to Hunt. According to him, Americans now use debit cards more frequently than credit cards to make purchases.
According to Hunt, businesses that offer digital loans to consumers have also displaced credit cards as a viable payment option.
But in the digital world, credit cards are totally functional. Using a website or app, digital wallets can now support contactless or card-not-present payments. Card-not-present purchases have grown more quickly than in-store transactions as a result of the rise in online buying, according to Hunt.
There have been credit cards for 70 years. They will undoubtedly continue to play a role in our financial lives for the ensuing 70 years.