Discover all there is to know about American credit companies. Read on with Cashfloat to see how they have changed society in a big way.
- Most people didn’t have access to much credit before the American credit card was introduced
- The first types of American credit card were limited to a specific store, and had to be paid back in full each month
- Technology made these cards much more accessible and easier to use
The social change effected by the use of credit in the US has also taken place in the UK and plenty of other parts of the world. However, the US is the place where this revolution, encompassing a change from saving to spending, first began. So, this article in the series about credit cards by Cashfloat, a responsible direct lender, will focus on many features. These include the development of the credit card, the change from charge cards to revolving credit, the mass marketing of cards, and how the advent of technology made the American credit card industry thrive.
In Part II, we will explore the various American credit card companies today. We will take a look at how they work, including the interests and fees that they charge, and discuss why fraud is so prevalent nowadays. We will end with a look at the debt levels of society nowadays, a clear indicator of the impact of credit cards on society.
The Introduction of the American Credit Card
Although credit cards were first introduced into the US in the 1950s, the use of this method of payment only became mainstream in the 1980s. Furthermore, the rise in consumer debt which previously had only been associated with a weak character became accepted as part and parcel of normal everyday living.
Bringing huge profits to the financial sector as well as a healthy increase in the retail industry, credit cards have been very influential in the health of the economy of the US and have also been partly responsible for the woes that beset the financial sector during the credit crash of 2008.The credit card evolved to fill the need for a system of deferred payments.
Credit Before Credit Cards
Just as in the UK, in the US there was not much in the way of available credit for ordinary people before the early part of the twentieth century. Local stores sometimes allowed farmers or businessmen to run up a tab so that they could buy essentials to last until their goods were sold and their accounts were settled, but there was no universal credit system in operation.
Credit handed out by company stores was also a policy that allowed some customers to become beholden to their employers. For example, when a company store was used, the customer was forced to pay a higher price for goods. This was simply to shore up the profits of the company which employed them.
The Revolving Credit Facility
The humble beginnings of the American credit card industry began with simple charge cards. Both Diner’s Club and American Express were very influential in the US. These charge cards allowed the cardholder to use credit until the end of each month. Then, they had to pay the bill in full.
Not everyone could get charge cards, and only certain establishments accepted them. Nevertheless, they were at the very heart of the gradual change from the cash economy to the credit economy which continues to thrive today.
Some companies like American Express offered a chance for customers to enrol in the Extended Payment Option (ExPo). This allowed clients to pay for higher cost items over a longer period of time. For travel expenses, there was a similar offer.
Charge cards often came with an NPSL (No Preset Spending Limit). However, this does not mean exactly what it says. The limit changes month to month according to the activity on the account. Factors such as payment history as well as changes to the economy can affect the spending limit on a charge card.
The Early Stores Offering Revolving Credit
In the late 1930s, the Wanamaker’s Store in Philadelphia was one of the first establishments to introduce revolving credit. That is, clients received up to four months to pay off the amount that they had spent. However, unlike modern day revolving credit, customers could not continue to buy more items while they still owed money.
In the 1940s, both William Forman stores and L. Bamberger and Co allowed true revolving credit. However, these cards were only for use in each individual store.
Universal cards i.e. those suitable for use in any store that participated in the American credit card scheme began in earnest in the 1950s and have evolved to the modern day credit card that is such a large part of our lives today.
Visa and Mastercard
Often referred to as a method of deferred payment, the credit card only really took off in 1958. The BankAmericard was sent out en mass as an unsolicited mailing to thousands of people who lived in California. You can read more about this, and how the bank ended up losing over $8 million, in Chapter 1.
BankAmericard eventually turned into Visa. The other big game player, issued by a conglomerate of banks that were part of the Inter-bank Card Association, was Mastercharge. This eventually turned into Mastercard.
The Chicago Debacle
Following this first experiment with mass-mailing of pre-approved cards, a similar mailing went out to the residents of Chicago when a number of different companies tried the same marketing technique. Unfortunately, they timed the event for the Christmas period of 1966. When an element of organised crime organisations heard about the mailing, they bribed some postal employees to intercept the cards which had pre-approved credit limits.
The result was the Chicago Debacle with hundreds of people receiving bills for goods that they had not bought on accounts that they had not opened. This was the first large-scale attempt at identity theft in the credit industry. It was a hugely influential factor in ending the practice of mailing out pre-approved credit cards. Watch this fun video for a detailed look at what actually happened.
The mass mailings of credit cards, which often went out to people who already had debt problems, health problems or were unemployed ended in 1970. This was after President Johnson’s special assistant likened the practice to ‘giving sugar to diabetics’ and the government sought to end the imminent financial chaos that they could envisage happening.
In the 1970s, when technology was fast evolving, the credit card industry moved online. In the US, this also allowed national standards to be introduced.
Prior to this period, state laws regarding the interest that could be charged were hampering the American credit card companies. Inflation was running high, but in some states, the interest rate was set too low for the companies to effectively service the account.
This meant that customers were charged rates of the state where they lived instead of where the company was located.
The new laws allowed credit card interest rates to be set at the rate of the state where the company was located. This caused some companies to move their headquarters from low rate states to high rate ones. One such company was Citibank which moved from New York to South Dakota. This allowed them to charge an interest rate of 20%. This figure was more in line with the inflation rate of the time.
The introduction of online banking technology also led to the rapid growth of the cash loans online industry, both in the US and elsewhere in the world.The state with the least interest rate regulations became the benchmark for credit card companies.
Benefits Of Technology
As technology continued to surge ahead, the credit card industry became truly national and then truly global.
In 1973, transaction times were reduced to one minute instead of taking around 5 minutes while the slip was signed, the signature checked and multiple pieces of paper and ID were exchanged. This era was followed by the golden age of credit during the 1980s when the use of credit cards really took off. Technology helped to turn a loss-making service into one of the most profitable parts of a bank or finance company’s portfolio.
Credit Card Security in the Early Days
Although credit card use was improved by technology, the modern constantly connected terminal was not available until the start of the 21st century.
Social Changes From 1982 to The Financial Crisis
Historians say that the golden age of credit cards was from the 1980s up to the financial crisis of 2008. During this period in the US, savings rates declined. There was an increase in the forceful marketing of cards. As house prices continued to rise, credit finally became socially and culturally acceptable to most people. Credit card debt was on the rise,
In the not too distant past, the ordinary American citizen had viewed debt as almost abhorrent. This was because many remembered the Great Depression of the 1930s. Then, saving a small amount out of each payslip was considered the wisest option if you wanted to avoid becoming completely broke if you lost your job.
By the middle of the first decade of the new Millennium, many Americans had little or no savings and some were thousands of dollars in debt. As credit cards gained popularity, so did other forms of credit such as short term loans for poor credit.
The Changes in Society
This change in the style of living led to huge profits for the financial companies issuing the credit cards. It also led to an innovative method of evaluating new customers by using the FICO credit scoring system. This system is the one that credit rating agencies in both the US and the UK still use today.
The increase of credit card use meant that consumers were living beyond their means. However, the credit card industry kept growing until the financial crisis that hit the whole world in 2008. When banks became more selective in who they gave credit cards to, then payday loans started rising in popularity.