Transcription
In 1949, businessman Frank McNamara was about to pay for dinner when he realized something terrible: he’d forgotten his wallet. While this scenario isn’t that uncommon, McNamara’s response was. Determined to ensure he’d never be caught without cash again, he invented the Diners 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 wasn’t the first person to codify the IOU— there’s evidence of deferred payment systems stretching all the way back to ancient Mesopotamia. In America’s Wild West, ranchers and farmers used metal plates as credit placeholders. And just a few years before McNamara's dining disaster, many department stores and airlines had already begun rolling out reward programs and charge cards.
But the Diners Club Card was different. Where previous credit arrangements saw one business authorizing credit for one individual, McNamara’s card gave users credit with over two dozen otherwise unassociated businesses. This decentralized credit was revolutionary, and in just one year, the Diners Club Card gained 10,000 users.
Soon, several US banks recruited local merchants and launched their own credit programs. For these merchants, credit cards provided increased business and upfront financing. For consumers, the cards offered financial flexibility, allowing them to make larger purchases so long as they could 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 additional 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 didn't pay to next month's bill.
Even in these early days, this system wasn't without problems. In 1958, Bank of America sent 60,000 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 card’s 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 losses, 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. And 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 ads that promised a more luxurious standard of living. These ad 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 state interest rates, allowing massive interest hikes throughout 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 deciding whether or not to approve loans, incentivizing customers to maintain multiple credit cards. And since most users don't pay off their bills in full each month, they rack up debt and endless interest payments. By the end of 2023, credit card debt in the US alone exceeded $1 trillion. So while the earliest credit cards may have been the most limited, they might have actually been the best for our wallets.