Credit cards are a relatively new development in the financial world but in a short space of time they have become an important part of the global economy. So, let us explore the history of the credit card. What is a credit card, how does it work and why does the world love using plastic instead of cash?
Credit cards are made of plastic and conform to a standard size. A credit card is basically a line of credit that can be used to pay for items in shops, to pay bills and you can also use a credit card to withdraw cash. Unlike a charge card which has to be cleared each month, a credit card is used as a revolving credit account which requires a minimum payment each month. If the full amount you have spent is not paid off then you are charged interest on the remaining balance. Interest rates will vary depending upon which company is issuing the card and whether or not you have used the card to buy goods or to withdraw cash. The minimum amount that has to be paid each month is a percentage of the balance and this could be 3% or 5% or you have to pay £5.00, whichever is the greater sum.
A credit card differs from a debit card in that you do not need to have any money in the bank to access the funds. However, you have to be approved by the bank or company issuing the card before you can open a credit card account. Each account holder has a spending limit and if you go over this limit without authorisation you will be charged a hefty penalty. Likewise, if you do not make the minimum payment on time you will also be charged and the balance can soon rocket. This is why it is important to understand that a credit card, when used sensibly, is a useful way of paying for goods but when used indiscriminately it can lead to serious debt problems.
A credit card carries a lot of information about the account holder. The card shows the name of the account holder, the account number, the start date and expiry date and a special security number. On the back of the card there is a space for the signature of the account holder and cards that are not signed are invalid. Credit cards can be extremely useful for paying for goods or services delivered by online websites and payments are secured using a series of encrypted codes. Websites that promise secure payment are easily identified by the little lock symbol that is evident on Internet Explorer and Mozilla browsers or just make sure that the website has https (note the s) in the title.
Although there were some forms of credit via charge cards like the Diners Club card and American Express the first real credit card issued in the UK was Barclaycard. Branded under the Visa logo, Barclaycard was first introduced into the UK in 1966. It had a monopoly until it was joined by Access (via Midland Bank) in 1972. Barclaycard is the leading issuer of credit cards with over 10 million UK users. The first cards has the account number embossed onto the front of the plastic card and when a payment was made this number was swiped onto a slip of paper which was then signed by the account holder. There were three copies of the slip; one for the bank, one for the retailer and one for the customer. There were strict guidelines about who could be issued with a card and it almost became a badge of honour if you could boast a Barclaycard in your wallet or purse. Many retailers asked for ID with a signature, such as a driving licence, and the signature was then compared to that on the card. They also compared the signature on the paper slip with that on the card to try to ensure that no fraud was being committed. These measures now appear to be extremely simple and naïve but at that time they were all that was needed when you used a credit card.
When the first credit cards were issued you had to look for the Visa or Access symbol in a shop to see if they accepted payment by credit. As the system took off more and more shops and stores began to accept credit cards. Soon other banks began to issue their own credit cards and there began to be special offers or deals to try to tempt customers away from one card account to another. In the 1980’s there was a huge advertising campaign by Barclaycard featuring Rowan Atkinson. The basis of the campaign was to persuade potential customers that the Barclaycard was accepted worldwide.
As the use of credit cards increased and new technology became available, cards were fitted with a magnetic strip and a PIN number was issued to the account holder. The PIN or personal identification number allows the account holder to use the card at an ATM or to pay for goods or services. It replaced the need for a signature and slip of paper. Banks made it clear that it was very important to keep the card and the PIN separate so that anyone finding a lost wallet could not use the card fraudulently. However, some people could not remember the PIN and there were many cases of theft when this new system was established. The PIN number that was issued could be changed at an ATM to something more memorable and a lot of people used birthdays or anniversary dates as their PIN number. Again, this proved to be simple for thieves to crack and many cases of fraud were experienced.
The rise in the number of credit cards on offer was accompanied by a relaxing of banking regulations and it soon became very easy to get more than one credit card with companies sending offers through the post. As long as you had one credit card and had paid it regularly, it became easy to get another one and many of the offers involved 0% interest rates for a specific period of time. This was cheaper than taking out a short term loan. And, although it was mandatory for companies to publish the interest rates charged on credit cards, many people only looked at the minimum amount that needed to be paid each month and ran up debts that eventually became unsustainable. The habit of using one credit card to pay off another became a way of life for habitual spenders who used cards instead of cash. Young people were targeted by credit card companies and seemed to be under the impression that as it was not cash they were spending it did not count. This led to a situation during the 1990’s when personal debt in the UK spiralled out of control.
Read more about the history of the credit card and online loans here.