A marvel in history: The credit card
By Rachel Hartman
November 10, 2014
The plastic we swipe today has come a long way since credit cards began in the 1920s.
Credit cards have undergone a series of changes and growth to become the payment method more than 160 million Americans carry in their wallets.
“Credit cards are an unbelievable marvel if you think about a globally interconnected secure payment system that you can use 24 hours a day, anywhere in the world,” says Todd Zywicki, George Mason University Foundation professor of law at George Mason University, and co-author of “Consumer Credit and the American Economy.”
Here's a look at how credit cards got their start, how they developed over the years and what lies ahead for plastic.
First credit cards
Retail store credit cards, often called proprietary or private label cards, and gasoline cards were the original credit cards in the U.S., says Michael Staten, professor and director of Take Charge America Institute at The University of Arizona.
These cards were designed to offer convenience and help build loyalty. For example, gas cards, made of paper and issued in the early 1920s every three to six months to car owners, made it easy for those traveling on business to fill up with fuel and stick to the same brand, according to Staten and the report “Credit Cards and Payment Efficiency.”
The first widespread use of credit cards was the charge card Diners Club Card, notes Danielle Fagre Arlowe, senior vice president of state government affairs for the American Financial Services Association. Established in 1950 in New York and made of cardboard, the Diners Club Card allowed cardholders to use the payment method in certain establishments instead of cash.
Decades of growth
The use of credit cards increased with the post-Second World War development of the middle class, notes Lewis Mandell, professor emeritus of finance and former dean of business at State University of New York at Buffalo. As this segment grew, more Americans were able to access and use credit.
When card issuers started offering rewards for spending on cards in the middle of the 1980s, credit cards became even more popular as an everyday payment device, says Staten.
As the number of cardholders increased, and as the amount charged on those cards grew, “lenders began to observe that the amount owed on credit cards was an important predictor of subsequent credit troubles, especially as measured as a percentage of the amount of credit line,” explains Staten. Today, credit cards are a critical part of building your credit file, because they reflect your ability to borrow and manage debt responsibly.
While plastic is commonly swiped today, new payment forms are on the horizon. In the coming years, “people may carry plastic less and less, or some may not carry plastic at all,” explains Fagre Arlowe. “We already see people using their phones for payments — and that trend will continue.”
In addition to phones, systems such as bitcoin may change how consumers carry out transactions.
“No matter what direction various forms of payment and credit take in the next 10 years, all fingers point to innovation and competition,” notes Fagre Arlowe. “And we believe increased competition is great for consumers.”