There are several claims by different companies and individuals declaring themselves the inventor of the first credit card. However, in today’s credit-reliant environment, all that matters is that someone brought the idea of a credit card to fruition!
Prior to the advent of credit cards, businesses and consumers were mostly limited to traditional means of paying for purchases – cash, personal checks, and store credit (if offered).
This brief summary should help you gain insight into the history of credit cards, and their general uses as we know them today.
Charge Cards
Still available today, the charge card was the first step towards the modern-day credit card. In the early 1900s, stores and gas stations began offering frequent customers a charge card to put purchases made at that specific store (Sears, Esso were among the first). A charge card had no credit limit, nor did it have an interest rate in most cases. It simply allowed the buyer to defer the payment to a date in the future, instead of paying for each transaction one by one.
Cardboard Credit Cards
This was taken a step closer to today’s credit cards around 1949 when Diners Club issued the first cardboard ‘credit card’ for use by members in restaurants and nightlife spots around Manhattan, New York. The members paid a fee in exchange for the privilege to sign for a check, which would be repaid later. The stores were promised more repeat customers as members would prefer the establishments accepting the card.
In just two short years, by 1951, Diners Club had around 20,000 members. They switched from cardboard to plastic credit cards just a few years later.
Other major companies followed suit, including the prestigious American Express brand, which introduced its first charge card to the United States and Canada in 1958.
Revolving Credit Card
The next big transition in the credit card industry was the switch to revolving credit. Initially, the entire balance of the card was to be paid off each month – this is how past and current charge cards function. Companies made money on the annual fee members paid. That changed when customers were allowed to roll the outstanding balance into the next month and pay interest on the balance.
Credit card companies recognized the need for more flexible payment terms, and the opportunity to generate additional streams of revenue from interest charged on outstanding account balances.
Modern Day Usage
The idea of ‘buy now, pay later’ really took off after credit cards became more popular. In the 1970s, Visa and MasterCard further expanded the reach of secured and unsecured credit cards by creating associations with member banks to work together, accepting payments via cards.
These companies don’t issue cards, lend the money, or act as a middleman between vendors and consumers. Rather, Visa and MasterCard became the middleman between large banks and consumers. They facilitate the processing of payments between merchants and banks. In 1985, the Discover Card was born, and it paved the way for the rewards cards of today.
Next we cover common credit card terminology you need to understand.
