The Evolution Of Credit Cards
Credit has existed for decades but not in the way that we see it today. Credit card history began in farming communities many years ago.
In rural areas, the owner of the local general store would extend credit to regular customers, and department stores in the would as well. Back then, credit was an open-book credit. The store owner would just record in his ledger the amount the customer owed. In general, the more farming oriented a town was, the more dependent they were on credit.
As the years passed, department stores made credit available to more middle income customers, and it became necessary to implement a different method to track customer balances. The first credit cards were made of cardboard. In the 1920’s, metal plates like those of Army dog tags were used.
The cards were generally associated with only one store such as Macy’s or Bloomingdales. It was not until 1949 when the first universal card to be introduced. That card was Diners Club. The idea behind Diners Club was simple in that it would be nice to have a method of payment other than your checkbook that you could use anywhere. That card was a huge innovation and eventially competitors entered the market such as the American Express and Carte Blanche which was issued by Hilton Hotels.
Banks began to issue their own credit cards in the 1950s. Visa started in 1958, and it was called BankAmericard, named after Bank of America. In 1966, they set up a national franchise program. Banks around the country were able to issue the BankAmericard credit card. It was a franchise organization where Bank of America was the franchiser and the other banks were franchisees. Similar to McDonalds. BankAmericard eventually became known as Visa in 1976.
Mastercard also came about as the result of a collaboration between various banks.
Banks needed to make sure the cards were widely accepted. They had to sign up merchants in addition to getting other banks to honor them. Merchants welcomed the cards, even though it cost them money. In the beginning, it cost the merchants 7%.
Banks had to figure out a way to get around interest rate constraints implemented by the banking laws. The laws prohibited banks in one state from lending money to people in other states. In 1978, a Supreme Court ruling specified that Nationally chartered banks could charge people in other states the interest rate set in the bank’s home state. This is when the floodgates opened up.
IN the 1980s, interest rates had declined but lending rates did not which led consumers to feel more like spending. There was a big period of profitability from 1983 to 1990. Up until 1983, the banks were charging interest rates of 18 percent, but their profit margin was small. The early 2000s could be compared to the 1980s in that there was lots of borrowing and plenty of out of control spending.
In 1989, Citibank and American Airlines collaborated to give consumers reward points. This was another innovation for the industry and it snowballed from there. More people were getting cards because they got rewards. It also led to people wanting to use the cards more.
Credit cards have developed a reputation for some questionable business practices to the point where regulators moved to control credit card companies very recently.
On Dec. 18, 2008, a set of regulations were developed to protect consumers from the worst lending practices such as double-cycle billing. The regulations will go into effect July 2010.
Included are rules that prohibit raising interest rates on current balances and prevent rate changes in the first year a card is open unless the rate change was initially disclosed.
Despite the regulations, credit cards are not going away anytime soon and consumers will continue to abuse the availability of credit.