The History of Credit Cards

Although mankind has embraced the notion of credit for eons, it wasn’t until 1950 that the forerunner of our modern-day third party, universal credit card was conceived. Various versions of the tale exist, but most historians agree that Frank McNamara, Alfred Bloomingdale, and Ralph Snyder (some authors have spelled this name “Schneider”) founded the Diners Club while dining in a fine New York City restaurant. The Diners Club card was different from other charge cards that existed at the time because it inserted a middleman between the consumer and the merchant. The consumer paid a nominal annual fee of $3 for the privilege of using the card and the merchant was charged up to 10% on each sale. Therefore, the merchant received approximately 90% of what the customer actually charged. Diners Club revenues were generated exclusively from these two sources. As the first of the Travel and Entertainment cards, balances were to be paid in full each month. (The concept of a credit card which charged clients interest on unpaid balances was introduced later by the banking industry.) Within a year, approximately 200 people carried the pressed-paper Diners Club card which was accepted in 27 restaurants around New York City. These founders also envisioned that one day their card would be universal, allowing customers to charge for goods and services in a variety of establishments throughout the country, not just restaurants in New York. Obviously, their vision was accurate and their perseverance paid off.

Prior to the advent of the universal credit card, department stores, U.S. hotels and oil companies issued charge accounts that were specific to their individual companies. In 1807, Cowperwaite & Sons of New York, which specialized in furniture, was the first large American company to introduce a formal charge account. In the 1930s, Wanamaker’s, a Philadelphia department store, was the first to offer a credit card with revolving credit. Customers were able to make partial payments on their balances, plus interest, or pay fully at the end of each month.

The convenience of charging became quite popular and in 1958, American Express and Carte Blanche (as well as many other companies) joined Diners Club. Bank of America entered the credit card industry at the same time, offering the BankAmericard. Bank-issued cards were termed “bankcards” and unlike travel and entertainment cards, they charged no annual fee for the privilege of using the card. Instead, they made their income solely from the merchant fees. Consequently, they were not very profitable. Bank of America was the first to offer payment options to its customers allowing them to make monthly payments on their balances or pay in full. Those who opted to make monthly payments were charged interest on their unpaid balances. BankAmericard was also the first to offer cash advances, with a whopping up-front 4% service charge! In 1966, BankAmericard (which became Visa in 1976) was made available across the United States. In competition, several banks joined together to form a second national credit card system, called Interbank. At the same time, Wells Fargo Bank joined with 77 other financial institutions, also to compete with Bank of America. Their card network was named Master Charge. Interbank and Master Charge merged in 1968, and joined by others, became the biggest bankcard in the country. (Master Charge became MasterCard in 1980.) Looking for customers and competitively pitted against one another, BankAmericard and Master Charge launched a series of mass mailings that resulted in tremendous growth in the industry. At the time, banks mailed unsolicited, actual credit cards to individuals. President Nixon ended this practice in 1970 because customers were being held legally responsible for ALL charges appearing on their unsolicited credit card accounts, even if unscrupulous individuals who had intercepted the mails and stolen the card fraudulently made the charges!

As popular as credit cards had become, they weren’t consistently profitable to the banks. A major problem was too many people paid off their credit cards fully each month, thereby denying the bank income from interest payments. Banks realized that middle class Americans might be a more profitable target group, i.e., individuals who would more likely make monthly payments on their accounts rather than use their cards as a convenience and pay their statements fully each month. (In time, this group was successfully marketed to the saturation point.)

Banks considered a number of options to improve the bottom-line from their credit card services. For example, they thought of imposing annual fees like Travel and Entertainment card companies had done for years, but they were afraid to anger and thus lose customers, so most banks refrained from doing so. Unable to raise interest rates because of prohibitive usury laws, banks changed how they calculated interest so that it was more beneficial to them.

Banks actually lost money on their credit card operations from 1979 to 1981 because of the high cost of money resulting from out-of-control inflation. A positive result of that high inflation was that states began easing their usury laws, which in turn, allowed banks to raise interest rates. Also, in 1980 President Jimmy Carter gave banks the impetus to charge annual fees. Reasoning that if consumer loans were limited, it would help reduce spending and consequently reduce inflation, the president got the Federal Reserve Board to put restrictions on consumer credit. The new Federal Reserve policies meant banks would incur even further losses, so they responded by charging their customers annual fees. The banking industry was able to return to profitability because of increased interest rates and annual fees.

The industry witnessed tremendous growth from 1982-1986. Although inflation declined and interest rates dropped, banks kept their credit card interest rates high. Most importantly, the public did not complain about high interest rates on their cards or the fact they were regularly being charged an annual fee. It was with gusto that the industry marketed middle class Americans with credit cards … and a one-time loser became very profitable to banks.

After saturating the middle class with plastic, banks looked to new arenas to make money. They engaged in marketing affinity cards (popular with colleges and universities), secured credit cards (popular with individuals who have low incomes or a poor credit rating), and targeted the more affluent. They also marketed aggressively to our student population. No longer concerned that financially inexperienced and unsophisticated young adults might behave irresponsibly if they had access to credit cards, they lifted all barriers and offered them to students without the requirement of employment or a parent’s co-signature. This practice resulted in serious negative consequences for many financially illiterate students. Due to the passage of the Credit CARD Act of 2009, students must now show that they have adequate monthly income to pay their credit card bill or have someone over the age of 21 co-sign for their account.