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Credit News
The History of Credit Cards
January 1st, 2014
The History of Credit Cards

The word credit is derived from the Latin word "Credo," which means, "I trust you." In other words, I'll give you a product or service and agree to a deferred payment, because I trust that you will reimburse me. The concept of credit is not a new one, and can be confirmed to have been used as far back as 3,000 years throughout ancient Egypt and Babylon.

Even up through the early part of the 20th century, credit was used in much the same manner as it had been for previous millennia. This was primarily focused in agriculturally based regions, and acted similar to an open ledger system - the customer would buy merchandise, and their total debt would be tallied in a ledger.

Though the use of credit cards occurred in Europe as early as the 1890s, their use did not make it to the United States until the 1920s, when oil companies and hotels offered them to customers, most of whom were traveling middle-income salesmen. Though the details are somewhat fuzzy, it is widely thought that the first credit card offered by a bank occurred in 1946 through Flatbush National Bank based out of Brooklyn, New York. The brainchild of John Biggins, he dubbed the program "Charge-It," and it was formed as a direct relationship between the consumer, the bank and the retailer.

However, it wasn't until 1950 when Diners Club introduced their card that the modern era of credit cards began. Developed by Frank McNamara after an embarrassing incident during which he found himself without any cash at a restaurant, Mr. McNamara became determined to create a simpler, more convenient way for consumers to pay for things. Diners Club broke the mold by allowing a consumer to pay for meals anywhere the card was accepted, removing the barrier of retailer-specific credit. Despite the fact the Diner's Card wasn't really a credit card, since the balance had to be paid in full each month, it is widely thought of as the direct precursor to the modern credit card. In fact, the card was such a success that Diners Club made a $60,000 profit after only one year.

It wasn't until 1958 that the modern version of a credit card entered the scene when BankAmericard (now Visa) was formed. As the first card to offer revolving credit, consumers were no longer forced to pay their bill in full each month. Initially set up under only Bank of America, the company implemented a franchise program in 1966, where other banks had to pay for the privilege of offering the credit card. Despite their unique way of doing business, the franchise program was a flop, and the card became a cooperative between several banks in 1976.

MasterCard (initially known as Interbank, and later as Mastercharge), had its start in much the same way, but between banks in the Northeastern part of the United States. Mastercharge began charging 7 percent transaction fees for all retailers to use their cards, but due to stiff competition, the fees reduced quickly thereafter.

The success of credit cards seemed to reach a glass ceiling until the 1978 Marquette National Bank of Minneapolis v. First of Omaha Service Corporation Supreme Court ruling. This decision stated that, "We cannot assume that Congress was oblivious to the existence of such common commercial transactions. We find it implausible to conclude, therefore, that Congress meant through its silence to exempt interstate loans from the reach of 30." In layman's terms, this simply means that many of the regulations regarding interstate banking were lifted, thereby opening the door for a bank in one state to offer its card services to a consumer in another.

The 1980s were a period of economic boom, when inflation was reduced, which in turn spurred consumer spending. But instead of spending cash, as had always been the norm, consumers were now spending more and more on credit cards. Based on their explosive growth, credit card companies saw an opportunity to make even more money by charging ever-increasing fees, which have done nothing but blossom since.

Due to the proliferation of credit card use throughout the last few decades, numerous legislative actions have been taken to curtail the power of credit card companies. Arguably the three most important pieces of legislation for the consumer were the Fair Credit Reporting Act in 1970, the Fair Debt Collection Practices Act in 1978, and the Credit Card Act of 2009.

The Fair Credit Reporting Act "regulates the collection, dissemination, and use of consumer information, including consumer credit information." In other words, this law stipulates which information about a consumer can be shared, and that all information regarding a consumer must be reported equally. In 1978, the Fair Debt Collection Practices Act was formed to "to eliminate abusive practices in the collection of consumer debts, to promote fair debt collection, and to provide consumers with an avenue for disputing and obtaining validation of debt information in order to ensure the information's accuracy." Together with the FCRA, these laws serve as the foundation for modern credit card consumer rights.

The implementation of the Credit Card Act of 2009 was intended " establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan, and for other purposes." This law implemented guidelines stipulating that user agreements should be transparent to the consumer, as well as offering protection from arbitrary interest rate increases and excessive fees.

In just a few short decades, credit cards have evolved from a product born of convenience, to one that is nearly ubiquitous in every modern American household.
With the recent economic downturn, more cardholders than ever are paying their balances in full each month, or working diligently to reduce any outstanding debt. Because credit cards have been molded to capture the majority of the bank's earnings based on revolving credit, this could have a huge impact on profitability if the trend continues. Only the future will tell.

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