Evolution of Credit cards: History explained
If you are new to the world of credit and credit cards, or if you want to know how credit cards came into existence, then this article is a must-read for you. When I was in school, I used to hear adults talk about finding the best credit card, building a credit score, increasing credit limits, getting cashback, and so on, but it never used to make any sense to me. I’m glad it’s not the same now. Everything related to credit cards makes sense to me, and I can now utilize my credit cards in ways I never thought possible.
Credit cards fascinate me, and I did thorough research on how they came into existence. If you are also curious like me, this article is for you!
Credit Card is like a Magic Card that allows you to buy things even if you don’t have the money right now. The bank pays the money on your behalf (it’s a borrowing) and you promise the bank to pay back later, usually more than what you borrow. Offering credit is one of the major sources of income for a Bank and all the banks offer credit cards, however, the interest charges may vary from bank to bank.
Credit card is a valuable tool to manage your finances and sometimes it becomes difficult to choose from many available options. After reading this article you will know the “History of Credit Cards”, you will understand the Evolution of Credit cards and how Credits/ Credit Cards work.
History of Credit/ Credit Cards
The concept of credit dates back many thousands of years, when businesses were emerging and the merchants started extending credit to customers in ancient civilizations. Just like today, in ancient times too people used to get into an agreement to buy something in the present moment and pay for it later. At that time, instead of plastic credit cards like we have now, they used things like metal coins, clay tablets to remember or to keep a track of how much they owed.
Many thousands of years later, the early version of first store cards started emerging. Where the farmers would borrow from the merchants and promise to pay when they harvest their crops that defined the credit period, i.e. the time period in which the borrowed money will be returned. At that the merchants would issue metal plates or coins which over time took evolved into cards that look like the credit cards we have now.
Evolution of Credit Cards
- 1920 – 1950:
Charga plates can be considered as first version of an early credit card that was used in the United States during 1920s and 1930s and were actively used till 1950s. This was a method of bookkeeping. Charga plate was about the size of a dog tag with a customer’s name and an account number.
- Whenever a customer used to buy something from a merchant, then using a special machine the merchant would imprint the amount of purchase onto the customer’s Charga Plate, the customer would then sign the plate to authorize the transaction.
- At the end of the month, the merchant would add all the transactions on the Charga Plate of a customer and send a bill to the customer for the total amount owed. As mentioned earlier, this was a method of bookkeeping that allowed customer to buy things on credit and pay later, its exactly how we use our credit cards today.
- Charga Plates made life easy, however, there were some flaws in them too. There was a risk of fraud/cheating and it was also inconvenient to carry a metal plate, I guess that’s why they were replaced with credit card system later that we still use today.
- 1950 – 1960:
Diners Club Card can be considered as the next phase in the evolution of credit cards and it was a big jump from Charga Plates. It was the First Store Card that became very popular.
There is a story behind its emergence. In 1950, a man named Frank McNamara forgot his wallet at home and thought of this idea when he went out dinning. He teamed up with Ralph Schneider and created first-ever Store Card called the “Diners Club Card”.
It worked like below:
- People who had this card could use it to pay the restaurant bills,
- The bill would be sent to the “Diners Club”.
- The Diners Club would pay the restaurant and would charge a small fee for the service.
- The Card holders had to pay full amount to Diners Club every month.
The Diners Club Card quickly gained popularity among the customer and the merchants. It was a huge success and by the end of its first year it had more than 10,000 members and it partnered with 28 restaurant and 2 hotels in New York City.
This was first card that people find very convenient to carry and the loved the ease of use, especially, those who didn’t want to carry cash or checks to pay for the meals, travel and hotels.
Diners Club Card paved the way for the many credit card companies to enter the lending market. It is considered to be the Father of the Modern day Credit card that we use today.
3. Emergence of Bank Cards
We all know “American Express” now – AMEX is what we call it now. American express has a big contribution in development of modern day credit cards.
Amex was founded in 1850, it was started as an express delivery business and gradually it expanded its services and shifted its focus to financial products such as Money Orders, Travelers check and Credit cards. This shift took around 100 years and in the year 1958 American express developed first Charge Card.
It allowed the customers to buy things without carrying a balance from month to month, i.e. the customers were required to pay their bank in full each month. By doing so, American express avoided the risk of customer defaulting on their loaned amount. It earned revenue by charging an annual fee and the interchange fees paid by merchants who accepted the card.
Amex card was marketed primarily to wealthy, rich and affluent customer only such as big business executives and frequent travelers. Amex card was a widely accepted at hotels, restaurant and other high-end markets also the reason for its expansion was the different levels of benefits and rewards that it offered.
4. Bank of America
Bank of America was founded in 1904 as the Bank of Italy by Amadeo Pietro Giannini with its headquarters in San Francisco. It was primarily serving the immigrant communities that were refused by other banks. Gradually, it expanded its services in parts of California and became Bank of America in 1930 after a lot of mergers and acquisitions.
We know American Express developed the first charge card in 1958 and later that year Bank of America took a giant leap from Amex Card to BankAmericard. It was the first consumer credit card. It provided a way to customer to buy stuff on credit and pay over a period of time. The card was available to the customers of Bank of America in California but very soon it spread across other states of America and became a very popular payment option for American consumers.
It was many steps ahead of Amex and was the first card at that time to offer a Revolving credit line to its customer, i.e. customer could carry a balance from one month to another and had to pay interest on the outstanding balance. This was the first time when customers experienced the ease of making big purchases and were given an option to pay off over time. It was readily accepted by the customers and contributed towards its revenue generation.
5. VISA
In the year 1976 the “BankAmericard” was renamed VISA and it expanded to become a global payment network at millions of merchants over 200 countries and territories.
Today, Visa offers a variety of payment solutions including credit, debit, prepaid cards and many digital payment options. Visa’s payment network operates by connecting banks and financial institutions through centralized processing system. Visa helps a customer to buy using credit or debit card by moving the money from a customer’s bank to the merchant’s bank. When a store uses Visa to process a payment the merchant has to pay a fee for using Visa services, this fees is called Interchange fee.
6. Mastercard
Visa gave way to one of its competitor. In 1966 few bank collaborated and formed a partner called “Interbank Card Association (ITC) to compete with BankAmericard. ITC launched a new credit card, it was initially called as “Interbank Card”. Its name was later changed to “Master Charge” and in the year 1979 it was changed to “MasterCard” and is currently the second most popular credit card in the world.
I hope you found the article interesting and I was able to provide some additional information to you regarding Credit Cards. If you want to learn about how to begin a journey towards financial freedom click here.
