history of credit card

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History

The credit card was the successor of a variety of merchant credit schemes. It was first used in the 1920s, in the United States, specifically to sell fuel to a growing number of automobile owners. In 1938 several companies started to accept each other's cards.

The concept of paying merchants using a card was invented in 1950 by Frank X. McNamara in order to consolidate multiple cards. The Diners Club produced the first charge card, which is similar but required the entire bill to be paid with each statement; it was followed shortly thereafter by American Express.

Bank of America created the BankAmericard in 1958, a product which eventually evolved into the Visa system ("Chargex" also became Visa). MasterCard came to being in 1966 when a group of credit-issuing banks established MasterCharge. The fractured nature of the US banking system meant that credit cards became an effective way for those who were travelling around the country to, in effect, move their credit to places where they could not directly use their banking facilities.

There are now countless variations on the basic concept of revolving credit for individuals (as issued by banks and honored by a network of financial institutions), including organization-branded credit cards, corporate-user credit cards, store cards and so on.

In contrast, although having reached very high adoption levels in the US and the UK, it is important to note that in other cultures which were much more cash-oriented in the latter half of the twentieth century such as Germany, France, Switzerland among many others, take-up of credit cards was initially much slower. It took until the 1990s to reach anything like the percentage market-penetration levels achieved in the USA or UK. In many countries acceptance still remains poor as the use of a credit card system depends on the banking system being perceived as reliable.

In contrast because of the legislative framework surrounding banking system overdrafts, some countries, France in particular, were much faster to develop and adopt chip-based credit cards which are now seen as major anti-fraud credit devices.

Controversy

Credit card companies do not want merchants to charge credit card users more than they charge other customers, even though the merchant pays a fee of 2 to 3 percent (merchants negotiate an exact percentage with their banks) to process credit payments. In some countries this fee may be significantly more. If customers were responsible for this fee, it would often discourage credit card usage.

In many places, governments have passed laws (at the urging of the credit card industry) to make this illegal. Despite this, some retailing sectors flout this regulation, especially in areas of very competitive, commodity products such as personal computers, where the fine print of an advertisement states "prices already cash discounted -- surcharge for credit card". Other retailers offer incentives or bonus coupons for using cash, such as Canadian Tire Money.

Some critics have observed that this results in what is effectively a hidden tax on all transactions conducted by merchants who accept credit cards since they must build the cost of transaction fees into their overall business expense. The end result is that cash consumers are essentially subsidizing credit card holder purchases. The cost of the convenience enjoyed by card holders and the profits taken from transaction fees by the card industry (which has come to rely increasingly on this revenue stream over the years) is partially offloaded onto the backs of the cash consumer. Critics go on to say that further compounding the issue is the fact that the consumers most likely to pay in cash are the least able to afford the additional expense (card holders are more likely to be affluent, non-card holders less so). Australia is currently acting to reduce this by allowing merchants to apply surcharges for credit card users. In the United Kingdom, merchants won the right through The Credit Cards (Price Discrimination) Order 1990 to charge customers different prices according to the payment method, but few merchants do so (the most notable exceptions being budget airlines and travel agents).

However, there also exists an economic argument that credit card use increases the "velocity" of money in an economy, the result, higher consumer spending rates and higher GDP. Although there is many a sad story of credit card abuse, the trend is increasing use, with some predicting a cashless society in the not so distant future. There is some controversy about credit card usage in recent years. Credit card debt has soared, particularly among young people. The major credit card companies have been accused of targeting a younger audience, in particular college students, many of whom are already in debt with college tuition fees and college loans, and who typically are less experienced at managing their own finances. Credit card usage has tripled since 2001 amongst teenagers as well. The United Kingdom is the world's most credit-card-intensive country, with 67 million credit cards for a population of 59 million people.[1]

Since the late 1990s, lawmakers, consumer advocacy groups, college officials and other higher education affiliates, have become increasingly concerned about the rising use of credit cards among college students. A recent study by United College Marketing Services has shown that student credit lines have swollen to over $6,000. Since eighteen year-olds in many countries and most U.S. states are eligible for a card without parental consent or employment, the likelihood of increased balances, unwise use of credit and damaged credit scores increases.

According to Larry Chiang of UCMS, an example of a credit card class action was where issuers were "rolling back" posting times to extract more late fees. The due dates were "rolled back" from 1pm to 10am because mail was delivered in the afternoon so due dates were actually rolled back to charge more late fees. The following banks are listed (with the amounts penalized) in this one particular class action.

• Providian: $405m
• Citibank: $15.5m
• Chase: $22.2m
• Bank One: $40m

Another controversial area is the universal default feature of many North American credit card contracts. When a cardholder is late paying a particular credit card issuer, that card's interest rate can be raised, often considerably. Given this circumstance with one credit card, universal default allows other card issuers to raise the cardholder's interest rates on other accounts, even if those other accounts are not in default.

In the USA, Congress has been slow to introduce credit card reform legislation. A push toward expanding the disclosure box and incorporating balance payoff disclosures on credit card statements would go a long way in clarifying credit card debt's ramifications.