A Brief History of Credit Cards
Even though many of us cannot live without them, credit cards were not always part of our lives. There was a time, just two generations ago, when consumers had to carry cash everywhere, or rely upon store credit. It took several decades for credit cards to become the integral part of our lives that they are for so many of us today. The story of how Americans fell in love with plastic is an interesting one.
During the 19th century, some department stores and hotels issued what were known as “credit coins.” These were nothing more than metal tokens issued to persons with credit accounts.1 The credit coin enabled a clerk to identify people who had credit.
The coins were replaced by metal cards called charga-plates in the 1920s. Charga-plates were the first credit cards in the United States, but they could only be used at a specific business such as a gas station or a department store.
A charga-plate was a metal card with the customer’s name, address and account number stamped on it. A clerk took an impression of the card when a purchase was made to keep a record. The purchase was put on a bill sent to the customer each month. Customers had to pay the bill in order to keep card.
The first bank credit card was created by John Biggins of the Flatbush National Bank in Brooklyn, New York, in 1946. Biggins created a system in which customers used a card he called Charge-It to make purchases at businesses. The bank paid the business and billed the customer monthly.
Charge-It was only available to local businesses in Brooklyn, but it was the first card that worked at more than establishment. It was also the first card issued by a bank rather than a business. Merchants were willing to take Charge-It because it meant the bank would handle all the paperwork involved in issuing credit.
The next step was the creation of credit-card companies, businesses that specialized in issuing cards. Two men; Frank X. McNamara and Alfred S. Bloomingdale, came up with the idea of a card that would pay for restaurant meals. McNamara started the Diner’s Club in New York City in 1950, and Bloomingdale organized Dine and Sign in Los Angeles the same year. The two soon met and merged their businesses into the first national credit card: the Diner’s Club Card.
The Diner’s Club proved popular. It had 20,000 members by 1951, just a year after launching. Diner’s Club was the first national card to charge interest, 7% plus an annual fee of $3, to make a profit.
The Diner’s Club Cards were made of cardboard, but they were so successful that companies like Hilton Hotels and American Express took notice. Hilton issued its own card that became the Carte Blanche in 1958. In 1959 American Express brought out the first plastic card and created a national icon, the Amex card. American Express also created the first worldwide credit card network. Although they were made of plastic, these instruments were not credit cards in the modern sense. They were charge cards that operated on a closed loop. That meant consumers could only use them at a few businesses, often just restaurants. Since they were charge cards, users had to pay the balance off in full at the end of the month. That meant the cards were mostly used by the rich and people who travelled a lot.
The first true American credit card was the BankAmericard, issued by Bank of America in Fresno, California. Unlike the American Express or Diners Club, BankAmericard came with a revolving balance. That meant a cardholder only had to pay part of the balance each month. This made the cards useful to working and middle class families who might not be able to pay the whole balance.
Merchants were willing to take the card because they would get paid right away by Bank of America rather than having to bill customers and wait. BankAmericard was so successful that it was licensed to banks throughout the United States. The success of BankAmericard prompted Citibank to launch the Everything Card in 1967, and a competing group of California banks to start Master Charge in 1966. Master Charge and the Everything Card merged in 1969 and eventually became Master Card. BankAmericard is now known as Visa.
The basis of a nationwide credit network was laid in 1978 when the U.S. Supreme ruled that nationally-chartered banks could charge the same interest rate in every state. Before that, banks had to follow a complicated set of limits on interest rates created by state legislatures. This made it profitable for organizations like Visa and Citibank to issue credit cards nationwide. It also enabled banks to charge higher interest rates, which in turn enabled them to issue cards to middle and working class people. Advances in computer technology enabled companies to process transactions instantly with a swipe of a magnetic strip. This made it convenient to use credit cards at restaurants, supermarkets and other businesses.
Today there are almost 200 million credit card holders in the United States. To put that in perspective, there are just over 100 million families in the country. In other words, the vast majority of American adults are credit card holders and credit and debit cards have completely eclipsed cash in terms of ubiquity. While we may be on the cusp of a new trend toward phone-based payments, such as those currently offered by Apple and Google, one thing is clear - payment by credit is here to stay.