Credit – and by association the credit card – has become a cornerstone of the American way of life. Each American household is estimated to have among them at least 10 credit cards, not counting charge cards or house cards, and carries an average of $13,000 in credit card debt. This is however not a recent phenomenon.
It was only inevitable that Americans would invent the credit card. Americans have always been comfortable about using credit. The Europeans who started colonizing America in the 1600s came from countries that had put aside old prejudices about borrowing and lending, and the new attitudes toward credit were transplanted on North American soil.
Americans have also always needed credit: borrowing to buy land, to establish a business, to travel west in pursuit of valuable animal furs or in search of precious metals. Others went into debt in order to get to America in the first place — as the colonies’ indentured servants did — or stumbled into debt, and were released by royal decree to join English general James Oglethorpe in establishing the colony of Georgia.
By 1800 the United States was an independent nation, with debt being a way of life for many of its citizens. New York City pawnbrokers gave out loans against 149,000 separate pieces of collateral in 1828 — versus a population of only around 200,000. In rural areas, people bought horses, carriages, plows, seeds, clocks and household furniture on credit. Many promised to pay in full at harvest time; others relied on open-book credit.
Open-book credit was used to purchase inexpensive necessities of life such as food and clothing. A shopkeeper allowed customers to take home the goods they needed, and to pay what they could afford to, paying in part but not all of their balance each month — much like many credit card owners do today. Yet very few fell into drowning debt. Both credit card debt and open-book credit are classified as revolving credit.
Early 19th century merchants also offered a non-revolving type of credit, the installment plan. These plans were limited to well-to-do customers who purchased expensive items like a piano or a carpet. By the turn of the century, installment buying was no longer limited to the rich, and even working class families could purchase “discretionary” goods on installment. It got so that installment buying became associated with the needy. A further refinement on installment plans came early in the 20th century with the introduction of the department store house card or the charge card.
The charge card was first offered, like installment plans had originally been, to buyers of luxury goods. Up market stores provided the house card to their prized customers, which naturally made them very happy. The house card was convenient: they didn’t have to carry large amounts of cash or undergo the identification hassle if they paid by check. The customer merely presented the house card to a clerk for recording of the sale, and received a bill once a month for thirty days’ worth of purchases. The customer settled the bill in full each month. The store charged nothing for the service, but gained customer loyalty. This charge card made it easy for the store to keep track of sales, but, the biggest advantage was that the charge card increased sales per customer.
The history of credit took a big turn with a new development: growing automobile sales.
Autos were necessary but expensive to buy as a single purchase. Everyone needed the auto, and everyone was forced to buy cars with credit. Installment buying for automobiles gave respectability to buying on credit.
The other significance of automobiles on credit was that they allowed people to go long distances in a short time, to places where they were total strangers. And what if the car broke down? That was common with the early autos. Drivers could wind up far from home, in need of costly repairs, and without enough cash to pay for them.
To solve that problem, oil companies came out with their own type of credit card. This credit card could be used to buy oil, gas, and mechanical service. Unlike the department store charge card or house card, the oil company credit card could be used everywhere around the country.
Thus, by the 1920s the essentials of the modern credit card were at hand:
o Oil companies showed the charge cards could be used nationwide
o Automobile buying needs showed buying on time was respectable
o Americans had felt comfortable with credit for centuries.
It took another thirty years before the credit card as we know it was invented. Three men finally accomplished this over lunch in a New York City restaurant in 1949.
They were convinced that there was money to be made in consumer credit, and tried to find a way to tap it. The charge card or house card boosted sales and customer loyalty, but without interest, the charge accounts by themselves did not generate revenue. Installment sales did produce interest, but that was meant to cover the seller’s costs, and not to earn income.
Suppose, the three wondered, that a third party inserted itself between buyers and sellers. Suppose this third party promised the sellers many customers, those who would not have gone to them otherwise. Suppose the same party offered affluent people with good credit records a diverse choice of establishments (not just one department store or a chain of gas stations) where they could charge what they bought, no questions asked. Wouldn’t these well-heeled spenders be more inclined to patronize those establishments where they had credit? Wouldn’t business owners, seeing their sales increase and their profits soar, be willing to return a small percentage to the third party that helped provide them with the new customer base? Wouldn’t those small percentages add up to a small fortune?
They sounded out the restaurant owner, asking how much credit card business that went his way would be worth. The owner replied, “Seven percent.” And, Diners Club was in business.
The early Diners Club credit card looked like miniature books. The owner’s name was on the front of the credit card booklet; inside were the names of establishments that had agreed to accept the credit card. Owners didn’t pay any interest or annual fees, but they paid off their entire credit card bill every month.
By 1951, Diners Club had gone international and shown its first credit card related profit. Four years later, the familiar plastic credit card replaced the original paper credit card. In 1950, Diners Club had begun charging an annual $3 fee and had a selection of 300 businesses for over 35,000 credit card holders. By the mid-1960s, restaurants, hotels, airlines, retail shops and the like were happy to accept the Diners Club credit card. The founders’ dream of a universal credit card, used for various purchases all over the world, was being realized.
Diners Club had its imitators. In 1958, American Express issued its own credit card and the Hilton Hotel chain introduced Carte Blanch. All three were known as travel and entertainment credit cards, distinguishing them from another type of credit card, the bankcard.
Seeing Diners Club’s success, banks entered the credit card market during the early 1950s, and by 1955 over one hundred US banks offered credit cards to their customers. They were slowly making money, but they had no national credit card distribution because the law restricted interstate banking. In 1958, the largest US credit card operation belonged to Bank of America, but its BankAmericard could be used only in California.
To expand the newly fledged credit card’s geographical usefulness, Bank of America pioneered the national interchange that would enable all banks all over the country to offer BankAmericard. This credit card association later metamorphosed into Visa.
This move solved the credit card distribution problem. It also prompted large banks in the east to form a rival national credit card network, Interbank Card Association which became Master Charge, and later, MasterCard. Despite initial resistance from department stores, and other house card and charge card issuers, the two credit card associations eventually signed them up in the 1980s. The credit card industry had come of age.
Today, it is a rare business that does not display the Visa and MasterCard logos, along with those of the other credit card companies.