The Evolution of the Credit Card: A 70-Year Legacy

Feb 21


Richard Gilliland

Richard Gilliland

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Credit cards have woven themselves into the fabric of American financial culture, serving as a symbol of consumer power and economic activity for over seven decades. With an average of 10 credit cards per household and a collective debt of approximately $13,000, credit cards are a testament to the nation's longstanding relationship with credit. This article delves into the rich history of the credit card, tracing its origins from the early days of American colonization to its current status as a ubiquitous financial tool.

America's Credit Roots

The concept of credit was not foreign to the early European settlers who began colonizing America in the 1600s. These pioneers hailed from societies that had gradually shed their reservations about borrowing and lending,The Evolution of the Credit Card: A 70-Year Legacy Articles and they brought with them progressive attitudes towards credit that took root in North America.

Credit was not merely a convenience but a necessity for many Americans throughout history. It facilitated the acquisition of land, the establishment of businesses, and the westward expansion in search of resources. Indentured servants used credit to finance their passage to America, while others, burdened by debt, found new beginnings in colonies like Georgia, established by James Oglethorpe following a royal decree.

By 1800, the United States had embraced its independence, and with it, a culture where debt was commonplace. In 1828, New York City pawnbrokers issued loans against 149,000 items, a staggering figure considering the city's population of around 200,000 at the time. Rural Americans also relied on credit to purchase essentials like livestock, farming equipment, and household goods, often settling their debts post-harvest or through open-book credit systems.

The Dawn of Revolving Credit

Open-book credit allowed customers to acquire basic necessities such as food and clothing by taking goods on credit and paying what they could afford each month, similar to modern credit card payments. Despite the ease of access to credit, few found themselves overwhelmed by insurmountable debt. Both open-book credit and credit card debt fall under the umbrella of revolving credit, which allows for the balance to be carried month-to-month with interest accruing on the unpaid portion.

In the early 19th century, a non-revolving credit option emerged: the installment plan. Initially reserved for affluent customers purchasing luxury items, installment plans eventually became accessible to the working class, enabling them to buy discretionary goods. This shift in consumer credit paved the way for the introduction of department store house cards and charge cards in the early 20th century.

Charge Cards and the Luxury Market

Charge cards, like their installment plan predecessors, were first targeted at luxury goods buyers. Upscale stores issued house cards to valued customers, enhancing convenience and fostering loyalty. These cards eliminated the need to carry large sums of cash or the hassle of check identification. Customers would receive a monthly bill for their purchases, which they were expected to pay in full, with the stores absorbing the cost of the service in exchange for increased sales and customer retention.

The Automobile Influence on Credit

The rise of automobile sales marked a significant turning point in the history of credit. Cars were essential yet costly, necessitating credit for their purchase. This need for auto financing lent credibility to buying on credit. The advent of oil company credit cards addressed the issue of drivers needing repairs far from home, offering a means to pay for oil, gas, and mechanical services nationwide.

By the 1920s, the foundation for the modern credit card was established:

  • Oil companies demonstrated the nationwide applicability of charge cards.
  • The automobile industry normalized the concept of purchasing on credit.
  • Americans had a centuries-old comfort with using credit.

The Birth of the Modern Credit Card

It wasn't until 1949 that the credit card as we know it came to fruition, thanks to the vision of three entrepreneurs over lunch in a New York City restaurant. They recognized the potential in consumer credit and sought to capitalize on it. They envisioned a third party that could bridge the gap between buyers and sellers, offering a network of establishments where affluent individuals with good credit could freely make purchases. This concept led to the creation of Diners Club, which charged an annual fee and required full payment of the monthly bill.

Diners Club went international by 1951 and introduced the first plastic credit card in 1955, replacing the original paper version. With an annual fee of $3 and a network of 300 businesses, Diners Club amassed over 35,000 cardholders by the mid-1950s. The universal credit card dream was becoming a reality.

The Expansion of Credit Card Networks

Diners Club's success inspired competitors like American Express and the Hilton Hotel chain's Carte Blanche. Banks also entered the fray in the early 1950s, with over one hundred U.S. banks offering credit cards by 1955. However, interstate banking laws limited their reach until Bank of America's BankAmericard, later known as Visa, established a national interchange. This move was soon followed by the formation of the Interbank Card Association, which evolved into Master Charge and then MasterCard.

By the 1980s, Visa and MasterCard had incorporated department stores and other charge card issuers into their networks, marking the maturation of the credit card industry. Today, the Visa and MasterCard logos are a common sight in businesses worldwide, signifying the widespread acceptance of credit cards.

The Modern Credit Card Landscape

The credit card industry has grown exponentially since its inception. According to the Federal Reserve's Report on the Economic Well-Being of U.S. Households in 2019, nearly 83% of adults had at least one credit card. The convenience and security offered by credit cards have made them a preferred method of payment for many consumers.

However, credit card debt remains a significant issue. The Federal Reserve Bank of New York's Quarterly Report on Household Debt and Credit for Q4 2020 revealed that total credit card balances stood at $820 billion. While credit cards offer financial flexibility, they also come with the responsibility of managing debt effectively to avoid financial strain.

In conclusion, the credit card has come a long way from its early days as a tool for luxury purchases to its current status as a staple in the wallets of millions of Americans. Its evolution reflects broader economic trends and changes in consumer behavior, and it continues to play a vital role in the financial lives of individuals and businesses alike.

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