The History of Credit As We Know It

          We study the past, some say, in order to understand the present as well as the future.  Knowing the origin of the credit card may help explain the attitude Americans have towards it.  I reflect on this history every time I use a credit card.

          Although credit cards are used to purchase many things, their history is inextricably tied to pleasure - the pleasure of eating.  A group of businessmen in New York thought it would be advantageous to be able to “sign” for their meals at a number of restaurants they frequented for business lunches and dinners much the same way they “signed” for goods and services purchased by their businesses.  This would avoid having to carry excess cash and allow them to easily account for their then fully tax deductible entertainment expenses at the end of every month.  This simple solution to a minor inconvenience led to the formation in 1950 of Diners Club, the first credit card company.  Members were issued a card that allowed them to charge meals at 27 New York City restaurants.

          As a matter of semantics, note that Diners Club issued a “charge” card.  Charge cards require consumers to pay for all purchases in full at the end of a billing cycle - usually 28 to 30 days.  The cost to maintain the charge system is paid by the participating merchants as well as an annual user fee paid by the cardholder.  It is, in essence, a full cash payment deferred until a later date.  Diners Club and American Express are examples of charge cards.

          On the other hand, credit cards allow the consumer to pay a monthly minimum on their purchases.  Credit card systems are paid for by participating merchants (at a lesser fee than those of charge card systems) as well as by the consumer who pays interest on any unpaid balance.

          Bank of America issued the first credit card in 1958.  It was called BankAmericard and was the forerunner of today’s Visa.  The exponential growth of credit cards - from a few thousand to nearly 2 billion in 50 years - has had an enormous impact on the worldwide economy, but none so much as on the welfare of every American.

          In the 19th century, merchants selling relatively high-priced items realized they could expand their customer base by using a practice that originated in Paris, France known as installment selling.  Sewing machines, pianos and household furnishings were the first items marketed to low-income households using the installment method of payment.  Buyers entered into a contract with a merchant that stipulated payment would be made at regular intervals in set amounts.  The buyer could use the goods, but they legally belonged to the seller until the balance was paid in full.  If a buyer defaulted on the contract, the seller reclaimed the goods and all former payments were forfeited.  Installment buyers usually paid a higher price for the goods, the difference covering insurance, interest and finance charges.
 
          It was the automobile that brought about the proliferation of installment selling to include durable goods of every kind that would have otherwise been out of reach for the average wage earner.  These same so-called “high ticket” items along with real estate are still commonly purchased on the installment plan.  This differs significantly from credit card purchases.  The credit card issuer usually has no remedy should the cardholder default on payment except to turn the account over to a collection agency and try to cover at least a portion of the money due.  There are no goods to repossess.

          In order to understand the present, it is always helpful to know about the past. Credit is no different. It's history may be able to help break today's chokehold that credit has on all of us.

The American Bankers Association reports that more than 3% of credit card borrowers are consistently delinquent on their payments.

More Americans declared bankruptcy in 1996 than graduated from college.

By Candee Lynn Wilson, The Saving Lady