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The History of Credit Cards

Credit cards are basically a staple nowadays. About 79% of Americans have at least one credit card, according to a 2016 Federal Reserve report. We take for granted that we can use credit cards at most retailers and some people even use credit card rewards for travel hacking. But when you think about it, credit cards haven’t been around for that long. So how did we move from cash to small plastic rectangles? What did the first credit cards even look like? To answer these questions, let’s take a trip through the long history of credit cards.

Looking for a new credit card? Check out the best credit cards of 2017.

The Early Days

In the beginning, there was cash. Well, we’ll begin this story with cash. But in those days, what would happen if you needed to buy something but you weren’t carrying enough cash with you? That’s when credit came into the picture.

Around the early 1900s, merchants like hotels and department stores began issuing charge coins to select customers. At the time, charge coins were quite an advancement. They could only be used at the store or merchant where they were issued. Each coin had a customer’s account number on it. Merchants could then imprint the coin onto a sales slip. This practice would help reduce errors that came from manually writing down a customer’s information. However, fraud was still common among charge coin usage, especially without customers’ names printed on the coins.

By the 1920s, some merchants and oil companies were offering charge cards or metal charge plates. Customers could only use these cards with the issuer and only in select locations. These would evolve into current day store credit cards, which still offer a solid credit card opportunity for some people. As time went on, more kinds of businesses followed suit including travel companies.

Then in 1946, John Biggins introduced the first bank card, the Charg-It card. The card was only available to the Brooklyn-based bank’s customers. These customers could use the card for purchases at local merchants. The merchant would then forward the bill to Biggins’ bank which would pay the merchant back.

From Coins to Cards

While consumers continued to use their charge cards, the cards did have restrictions. For one, you could only use the card at select merchants. Consumers didn’t have access to a general purpose card that they could use at multiple locations. Enter the Diner’s Club card.

Around 1950, a man named Frank McNamara found himself wallet-less after a business dinner. After that, he decided to create the first general purpose charge card, the Diner’s Club card. With this card, customers could use a small, cardboard charge card to make their purchases. Interestingly, this charge card was tailored for restaurant and entertainment purchases.

Best of all, customers only had to pay one monthly bill. The catch was that as a charge card, you had to pay your bill in full each month. So while the Diner’s Club card is referred to as an early credit card, it was actually more similar to today’s charge cards. Learn more about the difference between charge cards and credit cards here.

The Diner’s Club card exploded in popularity. It had 20,000 cardholders within a couple of years and in 1953 it became the first internationally accepted charge card. But the card was still made of cardboard, which wasn’t ideal. The Diner’s Club card switched to plastic in the 1960s, but it wasn’t the first plastic credit card.

The first company to issue plastic charge cards was American Express, which did so in 1959. Interestingly, American Express began as an express shipping company in Buffalo, New York. It introduced its first charge card in 1958, offering the first plastic card a year later.

Revolving Credit Comes Around

All cards up to this point were charge cards, requiring customers to pay each bill in full. So the next step for credit cards was to offer revolving credit. Revolving credit is what we’re more used to today, allowing cardholders to pay only a portion of their bill and carry over the remaining balance to pay at a later date. Some banks tried to use revolving credit in the 1960s, but they didn’t get far. It was just too risky.

Around the same time, charge cards’ popularity also posed another issue. They were popular but not popular enough. Customers didn’t want to use a card that only a few merchants would accept and merchants didn’t want to accept a card that only a few customers would use.

Bank of America broke this deadlock in 1958 with its newly launched BankAmericard program. In a huge publicity stunt known as the Fresno Drop, Bank of America mailed out 60,000 unsolicited, already activated BankAmericards. Each card carried a credit limit of $500. This tactic aimed to get a large number of people to use the BankAmericard. And it worked. It wasn’t all good though. There was widespread card fraud with 22% of accounts going delinquent.

The BankAmericard program saw such success in Fresno that Bank of America expanded the program to the rest of California the following year. The BankAmericard established many features that are still used today like credit limits, floor limits and a 25-day grace period for bill payment.

Networking: Visa, MasterCard, American Express and Discover

The History of Credit Cards
Noting the widespread success of the BankAmericard, Bank of America began licensing the BankAmericard name to other banks in 1966. The card even spread to other states. With this expansion, banks could now issue cards that would be more widely accepted by merchants.

Within 10 years, the BankAmericard brand had spread around the world. However, despite its popularity with both banks and consumers, some countries didn’t want to use a card associated with Bank of America. So BankAmericard and other BankAmericard licensees formed a new credit card network. That network would go by the name Visa. Sound familiar? Visa is now a multinational company and one of the largest financial institutions in the world. According to its website, there are now over 3 billion Visa credit cards worldwide.

Let’s go back to 1966, when BankAmericard’s network was still growing. At the same time, a group of California banks created a competitive network called the Interbank Card Association. This group soon changed its name to MasterCharge. Then in 1979 it became the name we know today, MasterCard.

As we mentioned earlier, American Express issued its first charge card in the late 1950s, immediately becoming a big player in the credit card game. American Express soon had about 1 million cards in use around the world within five years. However, American Express was largely reserved for more affluent clients. In 1966, the company issued its first Gold Card to cater to high-class business travelers, followed by the first Platinum Card in 1984. It wasn’t until the 1990s that American Express introduces a general-purpose credit card.

In 1985, Sears decided to get in on the action. It introduced the Discover Card, which disrupted the credit card industry with its no annual fee and high credit limit features. It also offered small cash back bonuses on purchases, which made it one of the first cash back credit cards.

Reaping the Rewards

In the 1970s and 1980s, consumers chose credit cards based largely on the card’s network. Each network came with its own perks that worked for some consumers and didn’t work for others. Additionally, merchants would vary in which network they would accept, with some accepting only Visa cards while others accepted only MasterCard. In turn, credit card issuers relied on the networks’ brand to promote their cards.

So when merchants began to accept multiple networks, credit card issuers had to come up with a new promotion strategy. They began to add extra card perks like sign-up bonuses, frequent flyer miles and cash back bonuses to attract customers. This sparked some intense competition between issuers to offer the best rewards.

Today, many people choose their credit cards exclusively based on rewards. And because of the industry competition, there seems to be a rewards program for just about every lifestyle. It now depends on you and your financial habits to determine the best rewards credit cards, rather than the credit card’s network.

Credit Card Regulations

It wouldn’t be a complete history of credit cards without looking at how the law played into its evolution. When charge cards and credit cards first became popular, there weren’t many regulations on how to use or sell them. In fact, lawmakers weren’t really sure how to regulate them. Things like a card’s APR, the annual percentage rate, had no clear definition. Each credit card issuer could calculate APR differently, posing an issue for consumers.

One example of the lack of legislation was the Fresno Drop. In the early days of credit cards, banks would create a list of people who they thought would make reliable customers. Those potential customers would then receive unsolicited credit cards in the mail. Without a law prohibiting this, banks were free to send you all the cards they wanted. (Sending a large number of unsolicited cards like Bank of America did in Fresno was known as a card drop.)

The Truth in Lending Act (TILA) of 1968 was the first big step to protect consumers. It set and clarified the rules on disclosures and standardized APR calculations. It also regulated practices for other loans, adding consumer protections like the right of rescission. TILA was part of the larger Consumer Credit Protection Act, with lawmakers amending both acts over the years to adjust with the advances in credit and loans.

For example, it became illegal for credit card issuers to discriminate against applicants because of their sex or race. Consumer protections against fraud were added, too, making them less liable for fraudulent transactions. The Card Act of 2009, which included increasing disclosure requirements, was part of these additions to credit and loan regulations.

The Bottom Line

The History of Credit Cards
Next time you go to swipe your credit card somewhere, think about how much credit cards have evolved since the 1950s. Heck, they’re still evolving. Magnetic stripes, which were introduced in the 1970s to increase security, are already fading away with EMV chip cards becoming the standard. Then CVVs, or card verification values, were added to credit cards to ensure extra protection when virtually swiping your card on online purchases.

Even physical cards could be on the way out with the rise of online shopping and platforms like Apple Pay and Android Pay. It’s impossible to predict where credit cards will be 50 years from now but if things evolve as quickly as they did over the last 50 years, we’re in for quite a ride.

Tips for Credit Card Users

  • Are you doing research before applying for a credit card? If so, here’s a helpful article about how to apply for a credit card.
  • One of the biggest advancements for credit cards was revolving credit. This gave consumers the option to make a minimum payment and then carry a balance between cycles, offering flexibility in finance management. However, carrying a balance can be a quick way to accumulate credit card debt. Here are a few things to know about carrying a balance.
  • When people talk about credit cards, you may also hear them talk about credit scores. Luckily, SmartAsset can help you learn about credit score ranges

Photo credit: ©iStock.com/bernie_photo, ©iStock.com/Oliver Hoffmann, ©iStock.com/martin-dm

Derek Silva, CEPF® Derek Silva is determined to make personal finance accessible to everyone. He writes on a variety of personal finance topics for SmartAsset, serving as a retirement and credit card expert. Derek is a member of the Society of American Business Editors and Writers and a Certified Educator in Personal Finance® (CEPF®). He has a degree from the University of Massachusetts Amherst and has spent time as an English language teacher in the Portuguese autonomous region of the Azores. The message Derek hopes people take away from his writing is, “Don’t forget that money is just a tool to help you reach your goals and live the lifestyle you want.”
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