How we got hooked on credit cards
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In 1949, businessman Frank McNamara was about to pay for dinner when he realized something terrible, heâd forgotten his wallet. While this scenario isnât that uncommon, McNamaraâs response was. Determined to ensure heâd never be caught without cash again, he invented the Dinerâs Club Card, a wallet-sized piece of cardboard that allowed carriers to dine at associated restaurants and settle their bills at the end of each month. McNamara wasnât the first person to codify the IOU. Thereâs evidence of deferred payment systems stretching all the way back to ancient Mesopotamia. In Americaâs Wild West, ranchers and farmers used metal plates as credit placeholders. And just a few years before McNamaraâs dining disaster, many department stores and airlines had already begun rolling out reward programs and charge cards. But the Dinerâs Club Card was different.
Where previous credit arrangements saw one business authorizing credit for one individual, McNamaraâs card gave users credit with over two dozen otherwise unassociated businesses. This decentralized credit was revolutionary. In just one year, the Dinerâs Club Card gained 10000 users. Soon, several US banks recruited local merchants and launched their own credit programs. For these merchants, credit cards provided increased businesses and upfront financing. For consumers, the cards offered financial flexibility allowing them make larger purchases so long as they can pay them off at the end of each month. And the banks profited from small fees on each transaction. But soon, banks found another way to make money from these cards. They began allowing cardholders to pay off their debt more slowly for an addional fee called an interest payment. Essentially, cardholders could choose to pay just part of their monthly bill, and the bank would add a percentage of what they didnât pay to next monthâs bill.
Even in these early days, this system wasnât without problems. In 1958, Bank of America sent 60000 unsolicited credit cards to residents of Fresno, California. While this promotion was intended to attract new customers, it mostly led to rampant card theft and unpaid bills. Banks also struggled to process all the payment paperwork these cards produced. At this time, charging a credit card involved stamping a cardâs embossed details onto carbon paper and sending out these charge slips for manual processing. But as credit card use boomed, banks were left with warehouses of unprocessed charge slips, creating delays that prevented them from charging interest. Despite these initial loses, US banks remained devoted to credit cards. At this time, it was illegal for banks to build branches outside their home state, so mailing credit cards was their best bet for attracting out of state customers. Once they brought in these new clients, they could sell them big ticket items like home and automobile loans. This led banks to double down on credit cards.
They invested heavily in early computers to process charge slips, and began running of ads that promised a more luxurious standard of living. These ads campaigns shifted the American attitude towards credit from one of shame and financial dependence to a celebration of financial freedom. However, the reality of these lending systems was far more exploitative. From 1956 to 1967, consumer debt increased by 133%, and concerns about consumer safety led to a surge of anti-credit activism through the 1960s.
This movement was dealt a devastating blow in 1968, when the Supreme Court removed the cap on the state interest rates, allowing massive interest hikes througout the 1970s. New complications emerged in late 80s with the invention of credit scores, which reinforced the racial, gender and class biases already impacting credit card applications. Today, credit cards are a $500 billion industry. Banks consider these lines of credit when whether deciding whether or not to approve loans, incentivizing customers to maintain multiple credit cards. And since most users donât pay off their bills in full each month, they rack up debt and endless interest payments. By the end of 2023, credit debt in the US alone exceeded $1 trillion. So while the earliest credit cards may have been most the limited, they might have actually been the best for your wallets.