As financial developments came about, they largely became available to businesses before consumers and often to wealthy consumers before the masses. As a result, the most ubiquitous financial products today are often among the newest. Credit cards, particularly general purpose credit cards of the sort familiar to us today, were relatively rare even fifty years ago, even in the United States. As credit cards became more common, the product spurred the development of other accompanying businesses and revisions to consumer protection laws.

Invention

            Department stores, oil companies, and hotel groups had ‘credit card’ programs dating to the 1920s. These were typically charge cards that had to be paid in full each month. Essentially, bills were simply accumulated into a single payment and, in the case of a gas station card, alleviated the need for drivers to always carry enough cash with them. They were used for convenience more than anything else. Longer term credit was not being provided so no interest would usually be charged. Some cards could be used by multiple businesses but only within the same industry; it was common, for example, for gas stations to accept each other’s cards.

            Beside these arrangements were installment purchase programs offered by retailers to help customers finance larger purchases over longer periods of time. While not a ‘card’ product, retailers began offering this financing in the late 19th century for purchases of more expensive consumer goods like sewing machines or furniture or other products like farm equipment. Installment financing for car purchases came soon after the automobile itself. Together with the limited card products mentioned earlier, this was the extent of consumer credit for decades.

            At least in America, the first general purpose credit card was the Diner’s Club card issued in 1950. Consumer credit was nothing new but supplying this credit was generally the role of the business selling to consumers; now, there was business providing credit in a revolving card form as its main operation. This though was a credit program that could be used by members at numerous businesses, beginning with restaurants in New York and Los Angeles but extending in time to hotels, retailers, and an airline. The concept was invented by businessman Frank McNamara, who conceived the idea in 1949 after leaving his wallet at home before a dinner out.

Sample Diner’s Club Card

Adoption

            The concept took off rather quickly; Diner’s Club had 42,000 members within a year. It was being accepted by at least some businesses outside the U.S. by 1953. In 1951, Franklin National Bank in Long Island, became the first bank to issue a charge card. The bank believed the card would be accepted by merchants hoping to keep up with their larger competition. Several other banks entered the card business at this time and an industry body, the Charge Account Bankers Association, was formed. A familiar name, American Express, entered the business in 1958. It had some 250,000 customers signed up before the card, with a $6 annual fee, was even released.

            That same year, Bank of America launched a credit card specific to California. They mailed 60,000 already activated cards to customers in Fresno, California alone. Whereas other early credit card products were largely useful for restaurant, travel, and entertainment spending, this card was very broadly accepted, at least within one state. Another card product, Carte Blanche, introduced by Hilton, was also launched in 1958. Chase Manhattan also got into the credit card business around the same time. This is also when consumer credit scoring was introduced by Fair Isaac Company in 1956, though industry-standardized credit scores only really took off with ‘FICO’, which launched decades later.

            A general purpose credit card offered far more convenience than older forms of consumer credit. More charges could be settled with a single monthly payment, far more convenient than always paying in cash or having separate accounts with various businesses. That said, the businesses accepting these early credit cards paid steep fees to accept them. Diner’s Club charged merchants 7% of each card transaction. The product was pitched to merchants on the basis that cardholders were likely to spend more than non-cardholders. Indeed, early credit cards were used primarily by the relatively well-off. Even in 1970, only 14% of American families in the middle-income quintile had a bank-issued credit card and 2% in the bottom quintile, compared to 33% among the highest-earning quintile.

            In the early 1960s, plastic cards with magnetic stripes were introduced. Until then, cardboard was used. Near the end of the decade, revolving consumer debt in the U.S. reached $2 billion. At the time, this was rather insignificant compared to the volume of nonrevolving consumer credit outstanding, such as in the form of installment purchase plans that had been around for decades. The adoption of credit cards may have been even swifter had defaults not come in higher than expected in the early years, an understandable outcome though given the lack of established credit reporting bureaus.

            Regardless, the credit card business continued to grow. By 1970, about one-half of American families had at least one credit card. However, even as late as 1970, these tended to be retailer credit cards accepted only by a single chain store. Even in 1970, true multi-purpose credit cards, usually issued by banks rather than stores, were still uncommon. Only 16% of American families had one.

Ubiquity

            Credit cards, and even bank-issued credit cards in particular, were soon to become commonplace. In 1986, Discover card was introduced by Sears. This product offered a cash-back rebate. While a retailer-issued card, the incentives it introduced increased competition generally and from this point on, credit cards in America competed on offering benefits like enticing sign-up bonuses, frequent flier miles, cash-back, among other incentives. With growing adoption and rising balances, revolving consumer indebtedness reached $626 billion in 2000. It had meaningfully displaced nonrevolving credit in consumer finance. By this time, credit cards were increasingly being used as a form of longer-term financing too; cardholders were increasingly likely to carry balances on their cards after month-end.

            By 2014, 72% of American consumers reported having at least one credit card. This was a proportion that was little changed since 1998; reflecting that by the end of the century, there was simply less room to grow further. Though change still comes; for example, the literal ‘card’ aspect of this product is diminishing in importance as credit cards are increasingly used digitally in mobile payments.

Processing Networks

            Almost as notable as the banks in the story of credit cards in America are the large credit card payment processing networks, Visa and Mastercard. These firms were important in creating national credit card networks at a time when American banks were, virtually without exception, local or regional firms. They came about as follows: in 1966, Bank of America licensed its card products to issuers in other states. Before the product’s name changed to Visa, the BankAmericard had become a household name, even to Americans far from Bank of America’s home market of California. The licensing scheme made the network national in scope. Now, cards in the network, even those issued by a single bank active in only one state, could still be accepted in other states, or other countries.

            A group of competitors to Bank of America, also in California, launched Interbank Card Association that same year. This was rebranded to Mastercard in 1979. These networks competed, particularly in the 1970s and 1980s, on the basis of the breadth of their networks. Eventually, the networks overlapped so much and credit card acceptance became so broad that the incentives offered by an individual card product came to matter more than whether it was on the Visa or Mastercard network and the two networks offered essentially a commoditized product as far as the average cardholder was concerned.

Regulation

            As with many new forms of credit, the advent of credit cards helped prompt new regulations in America, though most of these relate to consumer credit generally and likely would have come about anyway. Disclosure regulations were introduced with the Truth in Lending Act in 1968. Before then, cards would calculate the cost of the credit they were providing very differently, making comparison harder. Surveys showed that within two years, awareness of the cost of credit cards had risen sharply.

            Then, in 1974, the Equal Credit Opportunity Act prohibited discrimination on the basis of race or gender, among other factors, in credit decisions. Further regulations included the Fair Debt Collection Practices Act of 1977, which restricted the practices of debt collectors. More recently, the ‘CARD’ Act of 2009 applied further regulations to American credit card issuers, including limits to fees and interest rates, as well as additional disclosure requirements.

Lesson

            Credit cards extended many Americans’ relationship with credit. This product, like other financial products, also prompted many accompanying developments. One of these was the credit reporting bureau. Consumer credit scoring became more important for general purpose credit cards because, unlike a business which may have known its customers, a credit card issuer had no other way of ascertaining creditworthiness. Bank of America’s mailings of activated cards led to many delinquent accounts and outright fraud. Another development was that of the processing networks, which also grew around credit cards. Lastly, credit cards accelerated the demand for new regulations.

Further Reading

1.      Durkin, Thomas A. “Credit cards: Use and consumer attitudes, 1970-2000.” Federal Reserve Bulletin, vol. 86, no. 9, Sept. 2000, pp. 623–634.

2.      Johnson, Holly. History of Credit Cards: When Were They Invented? | Time Stamped, Time, 8 Jan. 2024.

3.      Markham, Jerry W. A Financial History of the United States. Sharpe, 2002.

4.      Tsosie, Claire. “The History of the Credit Card.” NerdWallet, 15 Mar. 2021.

5.      Wolters, Timothy. “‘Carry Your Credit in Your Pocket’: The Early History of the Credit Card at Bank of America and Chase Manhattan.” Enterprise & Society, vol. 1, no. 2, June 2000, pp. 315–354.

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