If you’ve ever used one of the modern, sleek metal credit cards to purchase a latte or a plane ticket, you might be surprised to learn that the concept of metal credit cards dates back to the early days of credit history. However, those initial metal cards were cumbersome and faced limited acceptance. Today, the convenience of making swift credit card payments almost anywhere is a seamless part of our routine, reflecting its contemporary design. Yet, like many aspects we now take for granted, credit cards have a rich history that deserves exploration.
Early Forms of Credit
Credit-like transactions have existed for millennia, with historical instances such as merchants providing farmers with seeds in exchange for future harvest repayment. One of the earliest documented examples of a credit system is found in the Code of Hammurabi, a set of laws named after the Babylonian ruler from 1792 to 1750 B.C. This ancient credit system outlined rules for lending and repayment, including provisions for charging interest.
Fast forward to the late 1800s, where consumers and merchants engaged in credit-based exchanges, utilizing “credit coins and papers” as transient currency. This practice, initially adopted by small-scale merchants, rapidly extended to various industries.
Around 1885, a precursor to contemporary paper store credit cards emerged, primarily issued to loyal customers of hotels and department stores. Although these credit lines were typically limited to specific locations, some were recognized by competing merchants, marking an early step in the evolution of credit accessibility.
Metal Money: Coins, Cards, and Charga-Plates
In 1914, Western Union distributed metal plates to select customers, offering them the convenience of deferred payment. Following this trend, oil companies in the ensuing decade introduced similar courtesy cards enabling customers to finance gas and repair services at their stations.
The evolution continued with the Charga-Plate, a metal card pioneered as early as 1928. Resembling a military dog tag, it fit into wallets, featured embossed cardholder information, and had a paper backing for the cardholder’s signature. This embossed design facilitated quick imprints for processing and was predominantly issued by larger merchants from the 1930s to the 1950s for use within their store networks.
The First Bank Card: Charg-It
A significant milestone in credit card history occurred in 1946 with the introduction of the first bank card system, known as “Charg-It,” by Brooklyn, New York banker John Biggins. Operating similarly to modern credit cards, customers utilized the card for payments at retailers, with the issuing bank reimbursing the retailer and subsequently seeking payment from the customer. Initially, Charg-It cards were limited to stores in close proximity to the card’s issuing bank, lacking nationwide payment capabilities.
Diners Club Card Is Created
In 1949, during a dining experience at Major’s Cabin Grill in New York City, Frank McNamara found himself without his wallet. Determined to avoid a repeat incident, McNamara, along with business partner Ralph Schneider, conceptualized and released the first cardboard Diners Club Card in 1950. Functioning as a charge card for consumers desiring deferred payment for travel and entertainment expenses, it marked the first card accepted by multiple merchants beyond a single geographic area.
The Diners Club Card quickly gained popularity, boasting over 42,000 members within a year of its 1950 launch. By 1951, acceptance of the card had proliferated across major U.S. cities.
More Card Issuers and Networks Form
In the wake of Diners Club’s success, various banks and financial entities sought to enter the burgeoning credit card landscape.
American Express
In 1958, American Express launched its credit program, initially mirroring the Diners Club Card as a charge card designed for travel and entertainment expenses, with full monthly bill payment requirements. A significant advancement came in 1959 when American Express introduced the first plastic credit card. In 1966, the company expanded its offerings by introducing a corporate credit card program tailored to commercial customers.
BankAmericard
Bank of America introduced the pioneering BankAmericard in 1958, representing the first true general-purpose credit card closely resembling contemporary credit cards. Initially crafted from paper but later transitioned to plastic, the card featured a $300 spending limit and permitted cardholders to carry balances from month to month for a fee. Distinctively, it could be accepted by any merchants willing to accommodate it. Up until that point, U.S. banking and financial services operated predominantly on a local scale. To compete effectively in the growing credit card industry, Bank of America, in 1966, initiated the licensing of its cards for use by other banks, extending its influence nationally. In a move to bolster the network, Bank of America, along with a consortium of banks, established the National BankAmericard, Inc. in 1970, later rebranded as Visa in 1976.
Master Charge
In response to the California-based BankAmericard, a consortium of east-coast banks formed the Interbank Card Association (ICA) in 1966. Their response, known as “Master Charge,” aimed to rival the BankAmericard. Pioneering advancements in the payment authorization process, the ICA established a central computer network in 1973 connecting merchants with card-issuing banks. Subsequently, in 1979, Master Charge underwent a name change and was rebranded as MasterCard.
Discover
The origins of Discover, now recognized as a prominent card issuer and network, can be traced back to the late 1980s when it was established by Dean Witter Financial Services Group, Inc., a subsidiary of Sears, Roebuck, and Co. In 1985, early test purchases using Discover cards were conducted by Sears employees at stores in Atlanta and San Diego. The public launch of the Discover credit card occurred through a national TV commercial during Super Bowl XX. A significant expansion of Discover’s global card reach transpired in 2008 when the company acquired Diners Club International.
Invention of the Magnetic Stripe
The advent of the magnetic stripe, positioned on the back of credit cards, is credited to IBM engineer Forrest Parry in the early 1960s. Initially devised for CIA identity cards, Parry’s magnetized tape emerged as a cost-effective solution for storing account information on payment cards and point-of-sale terminals. Before the magnetic stripe, credit card transactions were predominantly manual, marking a historic leap forward as transactions became computerized. Adopted as a U.S. standard for payment cards in 1969 and an international standard two years later, the magnetic stripe revolutionized the landscape of credit card transactions.
Early Industry Regulations
As the credit card industry experienced rapid growth in the 1960s, several critical issues demanded attention. Discrepancies in how card issuers calculated interest rates, lack of transparency, and the prevalence of fraudulent charges prompted legislative intervention. Beginning in 1968, lawmakers enacted the Truth in Lending Act, a crucial component of the broader Consumer Credit Protection Act. This legislation standardized the calculation of annual percentage rates (APRs) by banks and card issuers. Subsequent laws in the 1970s laid the groundwork for regulations that now safeguard credit card holders.
Rewards Programs Gain Popularity
In 1984, Diners Club pioneered its “Club Rewards” program, setting the stage for the burgeoning era of credit card rewards. Expanding on this trend, Citibank collaborated with American Airlines in 1987 to establish a credit card reward program, enabling customers to accumulate points for free or discounted airfare through card usage.
Throughout the 1990s, the popularity of reward programs soared, with card issuers enticing customers through sign-up bonuses, cash back incentives, and co-branded partnerships. A notable example is the launch of American Express’s Membership Rewards program in 1991 (originally called Membership Miles), eventually becoming the world’s largest card-based rewards program by 2001.
New Technologies: Mini, Mobile, and Contactless Payments
Entering the new millennium, credit cards underwent technological transformations that shaped their trajectory. In 2002, Bank of America initiated the trend of “mini cards,” presenting keychain-sized versions of traditional cards. The Discover 2GO credit card, resembling a kidney shape, earned a spot on Time’s Top 10 Everything 2002 list.
Mastercard’s innovation continued with the release of the tiny Side Card in 2003, featuring contactless payment technology that enabled users to hover the card over terminals for seamless transactions. Recent developments include wearables such as watches, wristbands, and rings entering the contactless credit card payment arena.
The evolution extended to mobile wallets, which emerged in 2008 with the advent of smartphones and the opening of Apple’s App Store. Google Wallet, launched in May 2011, paved the way for apps storing payment card information for digital transactions. Although initially met with limited bank and retailer participation, Apple Pay’s introduction in October 2014 marked a turning point, boasting 220,000 merchants prepared to accept digital wallet payments at launch.
The CARD Act of 2009: Additional Regulations
Enacted on May 22, 2009, the Credit Card Accountability Responsibility and Disclosure Act of 2009, commonly known as the “CARD Act,” marked a comprehensive effort to curb detrimental practices by card issuers. Signed into law by President Barack Obama, the CARD Act has yielded substantial benefits, with consumer credit card costs reduced by over $100 billion in the past decade.
Enforced by the Consumer Financial Protection Bureau (CFPB), the CARD Act introduced crucial consumer protections, including:
- Cost savings: Imposing restrictions on surprise interest rate hikes, capping late fees, and mandating more transparent billing practices, often referred to as “upfront pricing.”
- Statement clarifications: Requiring explicit penalty disclosures, such as due dates, late fees, and penalty APRs, on credit card statements. Additionally, statements must inform consumers about the duration required to pay off balances by making only minimum payments.
- Limits on young adult marketing: Prohibiting issuers from enticing potential applicants with alluring incentives on or near college campuses and implementing stricter applicant age restrictions.
Post-CARD Act, the Dodd-Frank Wall Street Reform and Consumer-Protection Act, signed into law on July 21, 2010, further safeguarded consumers against excessive credit card charges, especially in the aftermath of the Great Recession when many individuals grappled with credit card debt.
Security Concerns and Solutions
Recalling the notorious Target data breach in December 2013, which compromised over 40 million credit and debit account numbers, underscored the pressing issue of credit card security breaches. Beyond data hackers, card skimmers have exploited credit card payment technology by duplicating information stored in magnetic stripes, leading to fraudulent charges. Self-serve gas pumps and ATMs became prime targets for these security threats, prompting the U.S. Secret Service to crack down on gas pump skimmers.
To address these mounting security challenges, the U.S. initiated the adoption of EMV (Europay, Mastercard, and Visa) payment technology in 2011, with the nationwide shift officially taking place on October 1, 2015. EMV payment technology employs an encrypted smart chip instead of a magnetic stripe to secure account data and complete transactions. While magnetic stripes persist on most credit cards as a fallback option, the overarching goal is a phased transition away from magnetic stripe payments to enhance security at registers, gas pumps, and ATMs.
Credit Cards Today
The landscape of credit cards in the United States has never been more diverse, with issuers providing a wide array of options catering to various preferences, from travel rewards enticing prolific spenders to secured cards aiding individuals in establishing credit.
While the fundamental concept of credit cards remains firmly entrenched, the tangible cards themselves may soon be relegated to the annals of history. In tandem with the growing prevalence of mobile wallets, industry forecasts indicate that the next significant evolution in credit card payments could be biometric payments—a realm where selfies, fingerprints, and retina scans authenticate the account holder’s identity.
Considering our ability to effortlessly unlock smartphones through facial recognition, the prospect of replacing the act of reaching for a physical credit card with a gesture as simple as adjusting our sunglasses might not be too distant.