The dictionary defines the word credit as; –to believe; put confidence in; trust; have faith in, to bring honour, esteem, etc., to; reflect well upon.
For much of history. this was how small communities did their shopping, by trusting those who they knew. Shopkeepers needed to trust their customer to repay their debt. This was fine when most people came from their own small community.
But, America’s cities in the early 20th century were booming and growing. This made things rather more difficult. The large department stores couldn’t expect their staff to recognise everyone who wanted to shop. Retailers began to issue tokens to their trusted customers such as special coins, key rings and in 1928 some began to issue tokens that resembled dog tags. These were called ‘charga-plates.’
These became status symbols in their own right. They meant that you were trusted to pay and you could happily walk out of the retailers with the goods you wanted, without having to wait for pay day or when you had enough cash.
It wasn’t until 1947 when a token was issued that allowed someone to get credit from more than just one store. They could now get credit at many stores. It was called the ‘Charg-it’. This still, however, only worked within a two-block area of Brooklyn in New York.
2 years later in 1949, came a breakthrough with the issue of the ‘Diners Club Card’ aimed at the travelling salesmen.
This would allow them to buy fuel, food, rent hotel rooms and entertain clients at a network of outlets throughout the United States. It took off, with 35,000 people subscribing in the first year, as the company hurried to sign up as many hotels, airlines, petrol stations and car hire companies as possible.
The 1950s saw the launch of the American Express charge card and also credit cards set up by Banks.
Interestingly, Bank of America’s ‘BankAmericard’ eventually became ‘Visa’ and the ‘Master Charge’ card became its rival ‘MasterCard’
In the beginning, there were a couple of problems that needed to be solved. One was that retailers wouldn’t accept the cards without significant consumer demand. Conversely, many consumers couldn’t be bothered to sign up for them unless lots of retailers accepted them.
To overcome this the Bank of America tried an audacious move. It simply mailed a plastic credit card to every one of its customers in Fresno, California, 60,000 in all. This became known as the ‘Fresno Drop.’ The credit limit for each card was $500 (£380), around $5000 (£3,800) in today’s terms and no questions asked. Of, course, the Bank took losses. Some people simply didn’t pay it back and there was also blatant fraud by criminals who simply stole the cards from mailboxes.
Nevertheless, the ‘Fresno Drop’ was emulated by other Banks, who swallowed the losses, and by the end of 1960 Bank of America alone had a million credit cards in circulation.
The second problem was inconvenience. When a shopper used a credit card the assistant at the store would have to phone the users bank to get the transaction approved. It wasn’t long however, before new technology was introduced to make the process of spending less painful.
One of the best was the magnetic Strip. This was first developed in the early 1960s when Forrest Parry, an IBM engineer, was developing it for use on CIA identity cards. One evening he returned home with a plastic card and information encoded on a strop of magnetic tape. He was trying to figure out how to attach one to the other. His wife, Dorothea Parry, was ironing at the time and handing him the iron suggested he try that. It worked perfectly with the combination of heat and pressure and so the magnetic strip was born.
So, we can thank Mr and Mrs Parry for the fact that we could now swipe a Visa card in a shop. The shop could now send a message to its bank, which would send a message to Visa via network computers and the Visa computers would send a message to your bank.
There now followed a cultural shift. As long as your Bank trusted you to repay, no one else had to worry. Transaction approval was passed through the computers from the Bank to the shop. The shop issued a receipt and customers could happily walk off with their shopping. This whole process now only took a few seconds.
Subsequently, credit cards spread everywhere – and anyone could tap into a network of trust that was once the preserve of upstanding members of a tight-knit community.
It was a huge cultural shift. You no longer had to visit the bank manager for a loan and prove to them why they should lend you money or explain what you wanted it for. For the first time, you could buy what you wanted and just roll the debt over until you were ready to pay. as long as you didn’t mind paying interest rates of 20 to 30 percent, and at your own convenience.
Having such impersonal credit on tap, meant effortless payment and could be doing strange things to our psychology.
A few years ago, an experiment was done to test whether credit cards made us more relaxed about spending.
Two groups were allowed to bid for tickets, for popular sports fixtures, in an auction. No one knew what they were worth and one group worked with a credit card, the other with cash. There was a striking difference in the results. Those with credit cards bid substantially more than those with cash and in one case more than twice as much for one particular popular fixture.
So, the question is, is cash fast becoming obsolete? In some places, this seems to be the case. For instance, in Sweden only 20% of payments in shops are made with cash and just 1% of total spending by value is by cash.
Back in 1970, a BankAmericard advertising slogan had been, “Think of it as money.”
Today, for many transactions, physical money just won’t do. Most airlines, car hire companies and hotels want your credit card, not cash. In some countries, such as Sweden, the same is true for even small shops, such as coffee shops, bars and sometimes even market stalls.
Credit cards can – used wisely – help us manage our money. The risk is that they make it simply too easy to spend money – money we don’t necessarily have.
that distinctive feature of a credit card, called rotating credit, is now around $860bn (£656bn) in the United States, more than $2,500 (£1,900) for every American adult.
In real terms, it’s expanded four hundred-fold in 50 years.