The small molded piece of polyvinyl chloride known as the credit card has transformed the American and the world economy and promises to be at the heart of the future economic system of the world. Social scientists have long recognized that the things people buy profoundly affect the way they live. Microwave ovens, refrigerators, air conditioners, televisions, computers, the birth control pill, antibiotics—all have affected peoples' lives in profound ways. The credit card has changed peoples' lives as well, for it allows unprecedented access to a world of goods. The emergence of credit cards as a dominant mode of economic transaction has changed the way people live, the way they do things, the way they think, their sense of well being, and their values. When credit cards entered American life, ordinary people could only dream of an affluent life style. Credit cards changed all that.
Credit cards were born in the embarrassment of Francis X. McNamara in 1950. Entertaining clients in a New York City restaurant, Mr. McNamara reached for his wallet only to find he had not brought money. Though his wife drove into town with the money, McNamara went home vowing never to experience such disgrace again. To guarantee it, he created the Diners Club Card, a simple plastic card that would serve in place of cash at any establishment that agreed to accept it. It was a revolutionary concept.
Of course, credit had long been extended to American consumers. Neighborhood merchants offered credit to neighborhood customers long before McNamara's embarrassing moment. In the 1930s oil companies promoted "courtesy cards" to induce travelers to buy gas at their stations across the country; department stores extended revolving credit to their prime customers. McNamara's innovation was to create a multipurpose (shopping, travel, and entertainment) and multi-location card that was issued by a third party independent of the merchant. He took to the road and signed up merchants across the country to save others from his fate.
McNamara's success led to a host of imitators. Alfred Bloomingdale of Bloomingdale's department store fame introduced Dine and Sign in California. Duncan Hines created the Signet Club. Gourmet and Esquire magazines began credit card programs for their readers. But all of McNamara's early imitators failed. Bankers, however, saw an opportunity. Savvy as they are about giving out money for profit, bankers were more successful in offering their own versions of national cards. Success came to Bank of America and Master Charge, who came to dominate the credit card business in the 1960s. In the late 1970s Bank Americard became VISA and Master Charge became MasterCard. In 1958, American Express introduced its card. Their success the first year was so great—more than 500,000 people signed up—that American Express turned to computer giant IBM for help. Advanced technology was the only way for companies to manage the vast numbers of merchants and consumers who linked themselves via their credit cards, and in the process created a mountain of debt. Technology made managing the credit card business profitable.
To make their system work, credit card companies needed to get as many merchants to accept their cards and as many consumers to use them as they possibly could. They were aided by the sustained economic growth of the post-World War II era, which saw the United States realize the potential for becoming a true consumption-based society. Credit card companies competed with each other to get their cards in the hands of consumers. With direct mail solicitations, televisions advertisements, and the ubiquitious placement of credit applications, these companies reached out to every segment of the consumer market. Affluent Americans were flooded with credit card offers at low interest rates, but poorer Americans were also offered credit, albeit with high interest rates, low credit lines, and annual fees. As the cards filled the wallets and purses of more and more consumers, the credit card became the essential tool of the consumer society. At the same time the competition for the consumer heated up at the retail end. First to differentiate themselves from and then to keep up with competitors, more and more retailers, businesses, and services began accepting the cards.
By the 1990s, just 50 years after the birth of the modern credit card, there were more than 450 million credit cards in the United States—about 1.7 cards for each woman, man, and child. Moreover, more than 3 billion offers of credit cards are made annually. VISA administered about 50 percent of the credit cards in circulation. MasterCard had 35 percent, the Discover Card 10 percent, and American Express 5 percent.
The amount of money channeled through credit cards is staggering. By the late 1990s, about 820 billion dollars were charged annually—approximately $11,000 per family—and credit cards accounted for $444 billion of debt. About 17 percent of disposable income was spent making installment payments on credit card balances; the average cardholder owed approximately $150 per month. Eight billion transactions per year involve credit cards. Simply put, credit cards have a profound effect on the economy. To put the force of credit cards into some perspective, in 1998 the Federal Reserve put 20 billion dollars of new money into the economy, while U.S. banks unleashed the equivalent of 20-30 billion dollars of new money into the same economy via new credit cards and increased spending limits.
Given the strong tie between credit card spending and the economy, the fact that consumers have freely used credit cards to fuel their lifestyles has been good for the country, for the stock market, and for retirement plans. But spending is more than simply an economic issue. Spending reflects deeper and broader social and psychological processes. These processes may underlie the true meaning of credit cards in American culture.
Spending money to reflect or announce one's success is certainly not a new phenomenon. Anthropologists have long reflected upon tribal uses of possessions as symbols of prestige. In the past the winners were the elites of the social groups from which they came. But credit cards have leveled the playing field, affording the "common folk" entry into the game of conspicuous consumption. Indeed, the use of credit cards allows people with limited incomes to convince others that they are in the group of winners. Credit cards have thus broken the link that once existed between the possession of goods and success.
Money does buy wonderful things, and many derive satisfaction from knowing that they can buy many things. Credit cards allow consumption to happen more easily, more frequently, and more quickly. The satisfactions achieved through consumption are not illusory. Goods can be authentic sources of meaning for consumers. Indeed, goods are democratic. The Mercedes the rich person drives is the same Mercedes that the middle class person drives. Acquiring possessions brings enjoyment, symbolizes achievement, and creates identity. Because credit cards make all this possible, they have become a symbolic representation of that achievement. Having a Gold card is prestigious and means you have achieved more in life than those with a regular card. (A Platinum card is, of course, even better.) Credit cards are more than modes of transaction—they are designer labels of life, and thus impart to their user a sense of status and power. People know what these symbols mean and desire them.
The ways that people pay for their goods differ in important social, economic, and psychological ways. Unlike cash, credit cards promote feelings of membership and belongingness. Having and using a credit card is a rite of passage, creating the illusion that the credit card holder has made it as an adult and a success. Unique designs, newsletters, rewards for use, and special deals for holders make owners of cards feel that they are part of a unique group. Prestige cards such as the American Express Gold Card attempt to impress others with how much the user seems to be worth. Finally, credit cards are promoted as being essential for self-actualization. You have made it, card promoters announce, you deserve it, and you shouldn't leave home without it; luckily, it's everywhere you want to be, according to VISA's advertising slogan. Self-actualized individuals with credit cards have the ability to express their individuality as fully as possible.
There are, however, costly, dangerous, and frightening problems associated with credit card use and abuse. First, credit cards act to elevate the price of goods. Merchants who accept credit cards must pay anywhere from 0.3 to 3 percent of the value of the transaction to the credit card company or bank. Such costs are not absorbed by merchants but are passed on to all other consumers (who may not own or use credit cards) in the price of products and services. Second, credit cards create trails of information in credit reports that reveal much about the lives of users, from the doctors they visit to their choice of underwear. Not only do such reports reveal to anyone reading them information that the credit card user might not want made available, but confusion between users can result in embarassing and costly mistakes. Third, credit card fraud creates billions of dollars in costs which are paid for in high fees and interest rates and, eventually, in the price of goods. VISA estimated that these costs amount to between 43 and 100 dollars per thousand dollars charged. In 1997 credit card companies charged off 22 billion dollars in unpaid bills, 60 million a day. Finally, consumers pay in direct and indirect ways for the personal bankruptcies that credit card abuse contributes too. In 1997 the 1.6 million families who sought counseling with debt counselors claimed 35 billion in debt they could not pay, much of it credit card debt. The result of these problems is the same: consumers pay more for goods.
One of the untold stories in the history of credit cards is the manner in which the poorer credit card holders subsidize the richer. Payments on credit card balances (with interest rates that normally range from 8 to 21 percent) subsidize those who use the credit card as a convenience and pay no interest by paying their charges within the grace period. The 50 to 60 percent of consumers who pay their balances within the grace period have free use of this money, but they could not do so unless others were paying the credit card companies for their use of the money. The people who pay the highest interest rates are, of course, the people with the lowest incomes.
In an obvious way, the convenience of using credit cards increases the probability that consumers will spend more than they might have otherwise. But using credit cards is also a bit like the arms race: the more the neighbors spend, the more consumers spend to stay even. Such competitive spending, while a source of sport for the wealthy, can be potentially devastating to those on more limited incomes.
Interestingly, credit card spending may facilitate spending in a more insidious manner. Research has shown that the facilitation effect of credit cards is both a conscious/rational and unconscious process. At the rational end credit cards allow easy access to money that may only exist in the future. People spend with credit cards as a convenience and as a means to purchase something that they do not have the money for now but will in the near future. However, as an unconscious determinant of spending, credit cards can irrationally and unconsciously urge consumers to spend more, to spend more frequently, and make spending more likely.
Credit card spending has become an essential contributor—some would argue a causal determinant—of a good economy. Spending encourages the manufacture of more goods and the commitment of capital, and creates tax revenues. By facilitating spending, credit cards are thus good for the economy. Credit cards are tools of economic expansion, even if they do bring associated costs.
In 50 years, credit cards have gone from being a mere convenience to being crucial facilitators of economic transacations. Some would have them do even more. Credit card backers promote a vision of a cashless economy in which a single credit card consolidates all of a person's financial and personal information needs. And every day consumers vote for the evolution to a cashless electronic economic and information system by using their credit cards. Americans are willing prisoners of and purveyors of credit cards, spending with credit cards because of what they get them, what they symbolize, and what they allow them to achieve, experience, and feel. In many ways credit cards are the fulfillment of the ultimate dream of this country's founders—they offer life, liberty, and the pursuit of happiness.
—Richard A. Feinberg
Buchan, James. Frozen Desire: The Meaning of Money. New York, Farrar Straus Giroux, 1997.
Dietz, Robert. Expressing America: A Critique of the Global Credit Card Society. Thousand Oaks, California, The Pine Forge Press Social Science Library, 1995.
Evans, David S., and Richard Schmalensee. Paying with Plastic: The Digital Revolution in Buying and Borrowing. Cambridge, Massachusetts, MIT Press, 1999.
Galanoy, Terry. Charge It: Inside the Credit Card Conspiracy. New York, G.T. Putnam and Sons, 1981.
Hendrickson, Robert A. The Cashless Society. New York, DoddMead, 1972.
Klein, Lloyd. It's in the Cards: Consumer Credit and the American Experience. Westport, Connecticut, Praeger, 1997.
Ritzer, George. Expressing America: A Critique of the Global Credit Card Economy. Thousand Oaks, California, Pine Forge Press, 1995.
Simmons, Matty. The Credit Card Catastrophe: The 20th Century Phenomenon That Changed the World. New York, Barricade Books, 1995.
CREDIT CARDS introduce financial flexibility into modern consumers' lives. For those who always pay off their balances, credit cards eliminate the need to carry cash or obtain check-cashing approval. For those who carry a balance, credit cards allow acquisition of goods and services that cannot be paid for in full when purchased.
The twenty-first century extent of credit card use may be new, but its function is not. Before 1900, American families obtained "book credit" from merchants who allowed the same financial flexibility now provided by credit cards. But urbanization and the chain store movement rendered the old system of book credit infeasible.
The first step on the road to credit cards was development of store-specific metal charge cards in 1928. These cards continued the system of extending credit to favored customers. Clerks no longer needed to assess customers' creditworthiness; any one with a charge card received store credit.
Oil companies moved into credit cards as a way of building a customer base. As automobiles increased in popularity in the 1920s and gasoline stations proliferated, oil companies gave loyal customers paper "courtesy" cards that could be used at any of their stations. Balances were paid in full monthly. In 1939, Standard Oil of Indiana made a startling move when it mailed 250,000 unsolicited cards. By 1940, over 1 million cards circulated. In the 1950s, gas companies moved to embossed aluminum charge cards in the size still common in the early 2000s.
Early charge cards did not possess the key feature of modern credit cards: revolving credit, which allows card-holders to pay balances over time while simultaneously charging new amounts. Wanamaker's Department Store in Philadelphia moved toward a revolving charge account in the late 1930s when it gave customers four months to pay off a balance. This was not truly revolving credit, however; new charges were prohibited until the previous balance was paid. William Gorman introduced true revolving credit to department store cards in the 1940s, first at the L. Bamberger & Co. department store in Newark, New Jersey, and in 1947 at Gimbel Bros. of New York.
In all these cases, the card issuer's goal was to boost sales of the issuing company. Indeed, due to bad debts and fraud, the credit operations often generated a loss.
Universal cards, by contrast, are intended to earn a profit for the issuing company. There are two types of universal cards: travel and entertainment (T & E) cards, and bank-cards. The distinction between the two types of cards—evident in their genesis—had all but disappeared by 2000. T & E cards were issued by private companies. Diners Club led the way in 1950. The brainchild of theater producer Alfred Bloomingdale, his friend and head of Hamilton Credit Corporation, Frank McNamara, and McNamara's attorney, Ralph Snyder, Diners Club was initially a card for New York City businessmen to use at local restaurants. Cardholders paid an annual fee; merchants paid a fee of up to 7 percent of charges. Their local success led quickly to the establishment of Diners Club in Los Angeles and Boston, and by the late 1950s across the United States. American Express, whose name was affiliated primarily with traveler's checks, and Carte Blanche, a card established by the Hilton Hotel Corporation, were the other two widely used T & E cards; both were introduced in 1958.
Bankcards were issued by commercial banks, institutions that had traditionally been wary of lending to consumers. In the 1920s, for example, when automobile fi-nancing was booming, bankers shied away, taking the very need to borrow as evidence of a family's lack of credit-worthiness. But the Great Depression showed bankers the error of their ways. Despite high unemployment, consumers paid off their loans. Banks began to move into automobile financing after World War II and into credit card operations in the 1950s.
Bankcards, begun when cross-country travel was unusual and interstate banking was illegal, were initially regional operations. Bank of America, of San Francisco, introduced its Bank Americard in California and surrounding states in 1959. That same year, Chase Manhattan Bank, of New York City, introduced its Chase Manhattan Charge Plan (CMCP). After a ten-day grace period, card-holders paid interest on unpaid balances. Merchants paid up to 6 percent of amounts charged.
Bank Americard thrived but CMCP failed. The difference is attributed in part to accounting practices—CMCP charged its cost of funds and advertising to its credit card operations but Bank Americard did not—and partly to Bank of America's extensive California network of branch banks. Bank Americard went national in 1966. In response, a number of other banks formed the Inter-bank Card Association, later the provider of Master Charge. Bank Americard changed its name to Visa in 1976; Master Charge became Master Card in 1980.
In the late 1960s, bankcard companies sought to increase their customer base by mailing unsolicited cards. While they were successful in achieving their immediate goal, financial losses and fraud investigations soared. Although the number of actual fraud cases was low, many people feared they would be liable for charges on stolen cards. Responding to public outcries, in 1970 the Federal Trade Commission (FTC) banned the mailing of unsolicited credit cards.
Customer complaints were not limited to the unsolicited card mailings. The FTC's intervention in 1970 was followed by the 1972 congressional passage of the Fair Credit Billing Act, subsequently revised several times. Its eventual 1974 enactment included provisions covering both billing practices and disputes regarding defective merchandise. The final version of the Equal Credit Opportunity Act (ECOA) enacted in March 1977 prohibited the use of gender, race, national origin, and marital status as criteria for evaluating credit card applications, and required that unsuccessful applicants be notified in writing of the reasons the application was rejected. With ECOA, married women were first allowed to hold credit in their own names and to establish their own credit history independent of their husbands'. In March 1979, the Financial Institutions Regulatory and Interest Rate Control Act of 1978 became effective, including provisions protecting the privacy of credit card users.
Revenue from interest charges was often limited by state usury laws—laws establishing limits on interest rates. In the late 1970s, interest rates paid by banks to obtain funds rose so high that many states raised or completely eliminated their usury ceilings, allowing banks in some states to increase their credit card finance rates to as much as 24 percent. Customers seemed indifferent to interest rate increases. When other interest rates fell in the 1980s, bankcard companies kept credit card rates high: credit card finance rates averaged 17.3 percent in 1980 and 18.2 percent in 1990, during which time the prime rate banks charged their best business customers fell from 15.3 percent to 10.0 percent.
Extent of Use
The growth of credit card use in the United States since 1970 has been dramatic. In "Credit Cards: Use and Consumer Attitudes," an article published in the September 2000 issue of the Federal Reserve Bulletin, author Thomas Durkin reports thirty years of credit card statistics based on the Survey of Consumer Finances, a household survey conducted every three years by the Federal Reserve Board. In 1970, 16 percent of households held at least one bank credit card; by 1998, 68 percent of households did so. Only 37 percent of families with a bankcard carried a balance in 1970, but 55 percent did so in 1998. For those carrying a balance, the average balance, adjusted to 1998 dollars to eliminate the influence of inflation, was $839 in 1970 and $4,073 in 1998.
The likelihood of having a credit card rises with income: in 1998, only 28 percent of families in the lowest fifth of the income distribution had a bank credit card, while 95 percent of those in the highest fifth did. Families in the highest income bracket are more likely to pay off their credit card bills each month than are families in all other income brackets: 55 percent of families in the top fifth of the income distribution pay off their cards each month, but only 40 percent of families in the bottom four-fifths of the income distribution do so.
David Evans and Richard Schmalensee, in Paying with Plastic (1999), reported that outstanding credit card balances relative to income have risen since 1983, rising most dramatically for young adults. Credit card balances as a percentage of household income were 3 percent in 1983 but 50 percent in 1995 for 18-to 24-year-olds. The fourfold increase for households in the 25 to 49 age bracket, from 10 percent in 1983 to 41 percent in 1995, pales by comparison.
The 1990s rise in credit card debt went hand in hand with a drop in personal saving. Increased availability of credit cards might have led consumers to spend more than their incomes, accounting for the drop in saving. But the 1990s rise in the stock market increased wealth and led consumers to spend rather than save; perhaps families simply chose the convenience of charging rather than paying with a check or cash. Whichever causal story is correct, the rise in spending, drop in saving, and rise in credit card use in the last fifteen years of the twentieth century are certainly correlated.
Durkin, Thomas A. "Credit Cards: Use and Consumer Attitudes, 1970–2000." Federal Reserve Bulletin 86, no. 9 (Sept. 2000): 623–634.
Evans, David S., and Richard Schmalensee. Paying with Plastic: The Digital Revolution in Buying and Borrowing. Cambridge, Mass.: MIT Press, 1999.
Mandell, Lewis. The Credit Card Industry: A History. Boston: Twayne Publishers, 1990.
Manning, Robert D. Credit Card Nation: The Consequences of America's Addiction to Credit. New York: Basic Books, 2000.
Nilson Report. Home page at http://www.nilsonreport.com.
Spofford, Gavin, and Robert H. Grant. A History of Bank Credit Cards. Washington, D.C.: Federal Home Loan Bank Board, 1975.
At the beginning of 2000, Kiplinger's Personal Finance Magazine asked its readers to name which modern financial change had the most effect on them personally. The vast majority named the invention of credit cards. These small plastic rectangles, which most businesses now accept in place of cash, have become an everyday feature of modern life. The cards allow shoppers to take a purchase home one day and pay for it later. Credit cards have brought convenience to those who use them. They have also changed the way people both spend and save money and have therefore brought enormous changes to the world economy.
Department stores first introduced the charge card in the 1920s, usually a small metal plate imprinted with the customer's name. These "charge plates" inspired loyalty to the store that issued them because they could only be used at that store. In 1950, a New York man named Frank McNamara (1917–1957) had the idea of starting a credit company that would allow its customers to charge at many different places. His company, the Diners Club, collected a fee from participating restaurants and issued a card that allowed members to charge meals at all those restaurants.
The next step came in 1958, with the Bank Americard (now called Visa), issued by Bank of America. This card was accepted by many stores and businesses, and it added an exciting new feature. Instead of paying the total bill at the end of each month, as had been the usual policy with credit, customers could pay only a portion of their bill, rolling the remaining amount over to future months. For this privilege, however, users paid high interest rates (fees charged for borrowing the company's money). Other cards continued this profitable policy, notably the Master Charge (later renamed MasterCard), which was introduced in 1966.
Not everyone greeted the arrival of credit cards with enthusiasm. Many, including U.S. congressman Wright Patman (1893–1976) of Texas, called in the 1960s for an end to such easy credit. Patman argued that people would spend more money than they had and never learn to save or manage their finances. Credit cards have since become increasingly easier to get and use. There are still many who fear that they allow working people to become trapped by their debts. Others worry that credit cards encourage a society that values easy spending and consuming more than it values hard work and saving.
However, the use of credit cards continues to grow. In 1965, as the industry was getting its start, 5 million Americans had credit cards. By 1996, more than 1.4 billion cards were in circulation, charging $991 billion worth of purchases each year. Some kinds of shopping, such as automobile rentals and online buying, are almost impossible without a credit card. The widespread use of credit has given birth to its own brand of crime. Credit card theft and credit card fraud (using trickery and cheating) have become major problems.
For More Information
Ecenbarger, William. "Plastic Is as Good as Gold." Reader's Digest (May 1989): pp. 37–43.
Green, Meg. Everything You Need to Know about Credit Cards and FiscalResponsibility. New York: Rosen Publishing, 2001.
Miller, Ted, and Courtney McGrath. "Power to the People." Kiplinger'sPersonal Finance Magazine (January 2000): pp. 82–85.
Nocera, Joseph. A Piece of the Action: How the Middle Class Joined theMoney Class. New York: Simon & Schuster, 1995.
Ritzer, George. Expressing America. Boston: Pine Forge Press, 1995.
Shepherdson, Nancy. "Credit Card America: How We Became a Nation of Instant, Constant Borrowers." American Heritage (Vol. 42, no. 7, November 1991): pp. 125–33.