Credit Cards Past and Future

From the looks of it, credit cards are just a small piece of plastic, about 3 1/3 x 2 inches wide. But their impact over the last fifty years has been tremendous. By affording easy access to revolving credit, credit cards helped fuel a multi-decade consumer boom, which in turn spilled over into one of the longest periods of worldwide economic expansion seen in modern history.

It would have been hard for the originators of the first credit cards to envision that this small, wallet-sized player would have such far-reaching impact. It’s barely 50 years since Bank of America introduced the first credit card, the BankAmericard. Within a decade, the card had turned into Visa International and in 1966 was joined by MasterCharge, now MasterCard.

Initially, one of the major benefits of credit cards was to give consumers easy access to cash when they were traveling around the country and were unable to use their normal banking facilities. However, over time, it was the access to revolving credit that really made credit cards catch on. Before credit cards, when consumers wanted to make a major purchase, they only had two options: either save up the money beforehand or apply to the bank for a consumer loan. Getting a consumer loan was a lengthy process and had to be justified to get approved.

Credit cards changed all of that. All of a sudden, it was possible to charge most purchases to a credit card and pay the purchases off over time, with as little as 2% of the balance due each month. And while credit cards at first were somewhat difficult to get approved for, that changed over the years, as credit card issuers became increasingly bold in their marketing practices and lowered the bar for acceptance.

Credit cards today are the de-facto cash. There are more than 292 million credit cards in use in the U.S.,ⁱ and more than three quarters of U.S. families have credit cards.ⁱⁱ More than half of the U.S. population has at least two credit cards with many carrying as many as nine or ten.ⁱⁱⁱ The typical consumer has access to about $19,000 credit on all their credit cards combined,^iv making purchases of expensive items for the home or fancy new tech-gear easier than ever before.

It’s no wonder that credit cards helped create an unprecedented consumer boom in the last half of the 20th century. Unfortunately, as credit card spending increased, so did consumer debt. According to the U.S. News and World Report, the average consumer with a credit file now carries $16,635 in debt, including auto loans and excluding mortgages.^v And while it used to be that most people paid off their cards at the end of the month to avoid accumulating interest charges, that is less and less the case. Perhaps reflecting the economic downturn, more than 55 percent of credit card users kept a balance on their credit card in 2008,^vi a sharp increase from previous years.

Americans are now realizing that too much of a good thing can indeed be harmful. In times of economic uncertainty, a high credit card balance creates too much vulnerability.

Will we see the pendulum swing back on credit card usage as American consumers take steps to rein in spending and reduce credit card debt to avoid expensive interest charges? Most likely. Credit cards are far too convenient and there is no doubt that they are here to stay. Along the way, however, credit cards will teach us a few basic financial lessons: that having access to easy credit is not the same as having access to cash, and that it is better not to spend more than one can pay off after a short period of time. And that, perhaps, is not such a bad thing after all.

Published: May 22, 2009