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A credit card can get you anything from a new suit to a burrito from an outdoor truck. Though some controversy exists about this claim, Bank of America probably issued the first credit card accepted in multiple states in 1966. However, many products resembling credit cards have been in use since the late nineteenth century. A profusion of cards were issued by individual stores in the nineteen twenties, and stores began accepting others’ cards in the thirties. The first debit card, issued by the Flatbrush National Bank in Brooklyn, made its entrance in 1946.
In fact, the idea and the term “credit card” was used as early as 1887 in Edward Bellamy’s fictional novel Looking Backward. However, it took more than thirty years after the book’s publication for retailers to allow customers to buy wares using credit. Most early creditors dealt in gasoline, but the communications giant Western Union began offering credit to select customers in 1921.
Unlike contemporary cards, early-stage, store-specific charge cards required that the client’s balance be paid off monthly. This practice put a fairly low ceiling on how much these cards could be used and thus the benefit to the issuer.
As time went on, the fragmented charge card market consolidated into a few larger bodies. With more room to experiment, issuers tried out revolving credit schemes that allowed customers to carry a balance indefinitely in exchange for interest, and systems that allowed cards to be used in more than one place.
The first card with both of these features, Bank of America’s BankAmericard, was introduced in 1958 and represented the birth of the modern credit card. The card was initially useable only in California, but BofA soon established network of licensing agreements with partner banks across the country and around the world. This network eventually laid the groundwork for Visa. By 1967, a Californian competitor emerged: the MasterCharge network, which later merged with Citibank’s Everything Card to become the MasterCard credit card.
Despite security advances, rewards programs and the plastic card itself, the fundamental concept is little changed from the BankAmericard days. Clients sign up for and receive a card that they can use to buy products at any business that accepts it, spending up to a predetermined ceiling. After a certain period time has passed (usually 30 days), the institution backing the card assesses interest on any remaining balance.
Interest rates
A card’s APR, or annual percentage rate, depends on two factors: a baseline interest charged, and the individual cardholder’s credit score. That baseline interest rate, called the prime rate, historically indicates the rate of interest at which banks lent to their most favored – prime – customers. There is little variation in different banks’ prime rate, and is generally about 3% higher than the federal funds rate, or what the Federal Reserve charges when it lends to banks. Right now, the prime rate is 3.25% and the federal funds rate hovers at 0.25%. Many variable interest rates are expressed as a certain percentage above the prime rate.
Of course, actual interest rates are almost always higher than the prime rate. The interest earned by the bank must cover its operating costs, and among those costs are defaults. To compensate for the risk that cardholders will ultimately fail to repay what they owe, banks charge higher rates for those with bad credit.
According to the Federal Reserve, the rate of interest assessed on a credit card in 1974 was around 17.2%, falling to about 15.5% in the mid-1990’s. As the next twenty years went by, that number elevated a bit before declining to about fifteen and a half percent about halfway through the nineteen nineties. Today, we can expect minimum interest rates of around 14.65%.
Frequently, credit card companies will offer a 0% introductory APR period, after which the interest rate reverts to normal levels. Lenders hope that consumers will rack up a bigger balance during the low-rate window than they otherwise would, building a higher balance on which they will eventually pay interest.
However, this practice was curtailed by the CARD Act of 2009. Before the act passed, issuers could apply any payments over the minimum to the lowest interest rate account, forcing customers to pay higher rates for a longer period of time. Now, any payments over the minimum must go towards the debt with the highest interest rate. This makes balance transfer credit card deals an even more lucrative product to sell since, in effect, getting such a card at zero percent interest for a year means that whatever balance you shifted over from a higher interest card would be paid off first, while further purchases would be charged around 15% interest.
Rewards
The credit card market has become crowded and competitive, so companies are always searching for new ways to differentiate themselves and attract new consumers. It is now common practice to attach various forms of rewards on some credit cards, such as gas credit cards, cash back cards, and travel cards. Cardholders can earn rewards by frequenting certain stores or buying from categories such as groceries or apparel.
Credit cards grow in popularity
The amount of unpaid credit card debt in America rose from $1 billion in 1968 to more than $800 billion today according to Federal Reserve statistics – effectively a hundredfold increase after accounting for inflation and population growth.
A credit score is essential to modern American life: that number can make or break landing a room to rent, or even the job that can pay for renting it. Consumers are encouraged to make use of credit cards to increase their scores, toeing a fine line between proving creditworthiness and falling deeply into debt. The world of the credit card has changed radically since one-store card days of the 1920’s. While plastic’s proliferation offers convenience, consumers must be careful to live within their means.
