Discover the amazing history of credit cards in this fascinating article, packed with interesting stories and useful advice, from Cashfloat. Read on to find out more.
- Less than 100 years ago, most people did not have access to any sort of credit
- Charge cards were a very popular early form of credit cards
- Many large retailers were very reluctant to allow payment by credit cards
The History of Credit Cards
Have you ever wondered about the history of credit cards? Anyone who came of age in the late 1960’s will be familiar with the introduction of credit cards. People who were born and grew up after that era will not only be familiar with credit card transactions but will probably take for granted this method of payment for goods and services. However, before credit cards became part and parcel of our daily lives, most people had very little access to credit.
Cashfloat, a responsible online lender, tells a short story of the history of credit cards and how they evolved from being simple charge cards that were available to only a select few to the multi-billion pound business that they are today.
- Credit before credit cards
- Charge Cards in the US
- Card characteristics
- Diner’s Club and American Express
- Retailers and the card process
- Expansion of credit card transactions
The revenues that people in the US and UK generate from buying goods on credit is incredibly high. In fact, entrepreneurs build entire companies on the profit from this industry. The profits stem from people buying fashion clothing, music, and home goods, and all manner of services from car insurance and travel packages to paying for an expensive meal out.
In 2012 two-thirds of sales in the US were made using plastic cards while only 27% were made using cash. So, let’s take a look at the history of credit cards.
Before the First Credit Card
If we look back at the history of credit cards, we discover something interesting. Before the introduction of credit cards, there were few options for people who wanted to buy a large item without paying the full amount up front. The little credit that was available in those times was restricted to hire purchase agreements. These were only granted to certain categories of people. For example, hire purchase companies did not allow women to sign agreements. Instead, they needed the signature of a man (father or husband) if they wanted to pay for an item using the instalment system.
Credit for a housewife might consist of running up a weekly bill at the local shop. When the husband brought home his weekly pay packet, the housewife could pay off the debt. There were also some dubious money lenders around who charged exorbitant amounts of interest in return for a short term loan – loan sharks. Paydayloans were not regulated, and this form of credit was extremely dangerous.
Those citizens who had a bank account, and these were by no means the majority of the population of working class people, might have access to a small overdraft. But, the banks would only grant this after an intensive and searching face to face interview with the bank manager.
As was usual in this era, the richer portion of the population had access to credit, but for the ordinary people of the UK, it was a matter of saving up for whatever they wanted or needed.
Buy Now Pay Later
Following the lifting of restrictions on imported goods after the Second World War, the UK became awash with exciting new things to buy like record players, washing machines and refrigerators. There was also a new maxim around (brought straight from the USA) that exhorted the younger generation to ‘Buy now and pay later’. This saw an increase in the number of goods bought on hire purchase with young people buying a first car or furnishing their new home using this method of credit.
Barclaycard: The First Credit Card in the UK
Looking at the history of credit cards, we see that Barclays Bank was the first to introduce credit cards into the UK. Arriving on the scene in 1966, Barclaycard was the bank credit card that enjoyed a monopoly until 1972 when the Access Card was introduced.
Although there were two other cards that were already in use in the UK, notably Diner’s Club and American Express, these were charge cards. Users had to pay off charge cards in full at the end of each month. Hence, they are not part of the credit card family.
Characteristics of all Cards
These first two credit cards are still with us now in the form of Visa and Mastercard, and like all credit cards (and debit cards) they have to conform to a certain size and shape. This conformity allows customers to use the cards in special machines at retailers and bank ATMs. The technology in the 21st century has improved exponentially and has evolved so that now there is no need for a signature or sometimes even a PIN.
Magnetic strips and computer chips are now embedded into the manufacture of all cards, and these are just two of the security features that are helping to prevent fraud and misuse of cards.
The above statistic shows just how popular credit cards have become.
How Credit Cards Evolved From Charge Cards
There are many stories about how credit cards first evolved. However, even as far back as 1887, an author used the term credit card in a novel. However, it probably referred to a card that allowed the user to spend their citizen’s dividend (a payment from the US government).
Most experts in the history of credit cards agree that they evolved from charge cards which were used in the US by early oil companies and businesses like Western Union. Once companies started to accept each other’s charge cards, the concept of a universal card was not far behind.
The famous Sears store was one of the first to introduce a charge card in 1911. This continued until 2003 when it was bought out by Citigroup.
In America in the early 1930s, airlines began to accept payment for flights with air travel cards. Cardholders were given a preferential discount if they used the cards to book their flights. By 1940, the air travel card was accepted by seventeen airlines and customers could pay for flights in instalments.
In addition to being used for air travel, charge cards became commonplace at hotels and restaurants. They were soon very popular with companies. Bosses found that having a Diner’s Card allowed them to wine and dine new clients. Owning one of these cards introduced an element of kudos to some new up and coming businesses.
There is a legend that the founder of the Diner’s Club Card was inspired when he forgot his wallet. He had to sign for his meal and pay for it later. However, although this is a nice story, there is no real evidence that this happened.
What is certain is that Frank McNamara along with his associate Ralph Sneider created the Diner’s Club in 1950. This exclusive club had 27 restaurants participating in the scheme. Members had to pay 3 dollars per year for membership, and the partners signed up the first 200 members themselves.
Joining with another diner’s club started by Alfred Bloomingdale, the Diner’s Club charge card came into being. Profits were generated by the annual 3 dollar fee and the 7% commission paid by participating stores and restaurants.
Within eight years of the founding of the Diner’s Club card, other financial institutions began to follow suit. American Express was already a thriving company that operated a mail and money order business. This was the company that had launched traveller’s cheques as a means of making international trips easier to finance.
In 1958, American Express launched its charge card with a first issue of some 250,000 before the actual launch date. The annual fee was 6 dollars, and this card was marketed as a premium product due to its exclusivity.
Credit Card Applications – at first
Applications for the earliest credit cards, notably Barclaycard in the UK, were usually restricted to people with a monthly salary. Credit card companies only issued credit cards to those who they considered a good risk. In fact, having a Barclaycard was something of a status symbol in the 60s. It was probably the first example of the ‘yuppie’ culture.
The credit limits for these first cards were low by today’s standards with some only allowing a limit of £50. However, put into the context of the salaries of the time, this was quite a lot of money for most people.
How The Credit Process Worked
Looking back now, the process of using a very early credit card at a merchants was slow and almost painful. The very first card transactions in the US involved the merchant ringing their own bank which in turn had to contact the card issuer to confirm that the customer was creditworthy.
When cards came to the UK, transactions were also slow. First of all, you had to find a participating store which accepted the card. When you made a purchase, you placed the in a machine which printed a flimsy paper copy with the card details. You then had to sign the paper receipt which had three copies. One for you, one for the retailer and one for the issuing bank.
The cashier or person taking your payment then compared your signature to that on the back of the card. The whole process took days before it reached the bank and arrived on your account. Each month you would receive a statement. You had to pay a minimum amount by a set date. This was and still is, usually 3% of the total balance or a minimum of £5.00.
When you compare this process to nowadays, it’s hard to believe that it ever took off. Nowadays, you can even get same day loans in the UK by applying online!
Just like now, failure to pay or making payments after the designated date generated large fees which would rack up the amount owed.
Retailers Which Accepted Cards
While hotels, airlines and restaurants were some of the first businesses to readily accept payment by credit card, smaller retailers were reluctant to exchange these paper transactions for cash sales.
The stores which did accept cards displayed a sign over the cashiers’ till or had a list of cards prominently shown in the windows.
The benefits for the retailer were an increase in sales and soon these more than outweighed the fees that the credit company charged. Fees which helped to make this one of the most profitable financial businesses in the UK.
Expansion Of Credit Card Transactions
Most forward-looking businesses took on board the ever increasing use of credit cards. Many used this to their advantage to increase sales. But, some of the larger companies were reluctant to join the new age of credit.
One of the most reluctant, albeit not small retailers, was Marks and Spencers which did not accept credit card transactions until the year 2000. The store had its own charge card but eventually, due to diminishing sales, and as a method of attracting customers back to the store, M and S finally lifted its ban on credit cards in the new Millennium.
It took Aldi (the German retailer) until 2014 to start accepting credit cards although the stores had previously allowed payment by debit card, a system of transacting that cost them less in commission payments.
These days it would be a brave retailer that refused to accept payments by credit card and this lucrative financial business looks set to stay as a major part of the UK’s GDP.
Credit Card Fraud and Losses
It’s fair to say that as the credit card business expanded, criminals began to take advantage of the new payment method and there quickly arose a thriving currency in stolen cards.
The early frauds that people experienced were due to many factors. One of these was the way in which card holders were too casual about keeping cards and PINs safe. Looking back at the history of credit cards, we can see that the first cards were also easy to forge, and as we all knew little then about identity theft and impersonation, there were some instances of credit card fraud running into thousands of pounds on individual accounts.
However, the banks were quick to implement measures to combat fraud. The latest cards have many more security measures than those for cards introduced in the early days.
Still, the fact remains that in the US in 2013, transactions done by plastic accounted for 40% of financial fraud.
A Complicated Relationship
Using a credit card involves a number of parties, making the credit transaction a complicated relationship. We now take it for granted that when we swipe out our card, the transaction goes through simply and automatically. However, it is actually a very involved system.
The card holder and the retailer are just two of the parties involved when a transaction takes place. The card company, the bank of the retailer, the Credit Card Association, the electronic system that generates the payments and an insurance company which underwrites the whole lot are all involved too.
Steps of a Transaction
When using a credit card, we pass it to the sales person and then put in a PIN, and that is it. Sometimes even this simple process is bypassed as the latest cards allow contactless transactions for smaller amounts.
However, following this simple process, the transaction undergoes a series of steps. The process begins with authorisation through to batching, when the total transactions are submitted at the end of a business day to clearing and settlement when the card issuer pays the acquiring bank.
When the acquiring bank has the funds, it then pays the retailer an amount that is the cost of the goods minus a fee.
When there is any dispute about a payment e.g. if a cardholder queries a transaction, the money is held in a special account until the dispute is resolved.
So, what appears on the surface to be a simple transaction involves many stages before satisfying everyone with the end result. It is still far simpler than the original transactions in the history of credit cards!
The Benefits Of Credit
In spite of warnings from Shakespeare that we should ‘neither a borrower nor a lender be’ most people now use some form of credit in their daily lives. As long as you use a card sensibly and heed the warnings about overspending, then making a purchase using a card can be beneficial. This is especially true if the alternative would be an instant cash advance online.
Making a payment for a holiday using a card can give you extra insurance protection, and if you pay the full amount due each month, then you are getting the use of the bank’s money for nothing.
An interesting fact in the history of credit cards, and one that is still applicable today despite many people not being aware of it, is that under the Consumer Credit Act you get more protection when you pay using a credit card. If you use it to buy goods or services that cost between £100 and £30,000 and something goes amiss, or the company goes bankrupt, you can claim all the money back under Section 75 of the Act.
Fast And Cheap With Extra Rewards
Using a card to make payments is a speedy process, and it allows you to buy something now instead of waiting until you have the full amount saved up. These days there are also incentives to buy on credit as opposed to using cash. You might even be able to use a card for up to one year at a 0% interest rate.
Of course, if you are easily tempted into making impulse purchases then a card might be a hindrance rather than a help, but for those who are disciplined with money, a credit card can be very useful.
Borrowing for free using a 0% rate card means you can save some hundreds of pounds in interest, but this only applies as long as you pay off the balance before the interest-free period expires.
You can also earn points for air miles or cashback, but the real benefit of a credit card is that it gives you so much flexibility. Many hotels and car hire companies will insist upon a credit card to back up a booking. Without this handy tool you might not have access to some services.
The Downsides Of Credit In The 21st Century
Naturally, there are downsides to having a credit card. We’ve seen these throughout the history of credit cards. These become apparent when you owe a large sum of money and are unable to pay off more than the minimum amount each month.
Debt on credit cards became a major problem during the late 1990s and the early 2000s with many young people receiving high credit limits and then being unable to pay off the sums due. A similar thing was happening with short term loans uk at the time; many were taking advantage of the ‘free cash’ but then could not repay their loans.
There were mass mailings of advertisements for credit card offers with many new companies springing up and taking advantage of the retailing boom of that era. This aspect of the history of credit cards actually includes a rather humourous story.
In 1958, an employee of the Bank of America sent out 60,000 genuine credit cards to the residents of Fresno in California.
These paper cards had a credit limit of 300 dollars, and by the following year the same employee had sent out a total of two million cards. Sadly, a high percentage (20%) of the cards were used, but no payments were made and the bank lost around 8.8 million dollars (and the employee lost his job).
That particular history of credit cards cannot be repeated nowadays. These days there are more stringent regulations, and no unsolicited cards can be sent out. In addition, accepting applications for credit cards is more strictly controlled, and all finance companies and banks now use the credit rating agencies as one of the means of assessing new customers and their ability to pay on credit.
One of the worst ways to access cash is to use a credit card. When cards were first introduced into the UK, many people used them to take out cash to fund a night out, and the ease of use made this access to extra funds almost too tempting.
It was only when the statements arrived with fees attached to cash withdrawals that it became clear that this was an expensive way to borrow actual cash money.
Banks make a charge for cash withdrawals that can be as much as 4% of the amount withdrawn. So, this can never be an interest-free way to take out cash. There is usually also a higher rate of interest charged for cash withdrawals than for payments made when buying goods by card.
Here you have a short history of credit cards, of how they started and evolved.As well, there are some of the more pertinent points associated with using a card. The other chapters in this series of articles cover these points in more depth. You can learn most of what you need to know about applying for and using a credit card account by reading those articles.
In Chapter 2:
The next chapter reveals details about the use of credit cards in the US. That is where this handy financial device was developed first. We discuss both the history of credit cards and and the current time period. We will also look at the use of multiple cards in the US. Is this type of credit readily available to all citizens or just a selected class of people?
Figures published show that in 1999 US consumers used credit cards to make purchases worth a staggering 1.2 trillion dollars. So, we will also look at the impact of credit in the US. We will make some comparisons about the way that people use credit cards there and in the UK.