A History of Credit (and How to Manage Yours Better)

Alfred Bloomingdale, Diners Club developer and grandson of the famous department store founder, once said , “The day will come when the plastic card will make money obsolete.” At the time, this might have sounded futuristic, but today 62% of Americans think society will become cashless in their lifetimes, with all purchases made electronically.

So how did we get to a place where cash is on the way out, and credit is everywhere? The origin of the credit card, and its subsequent rise, can help explain the current credit landscape, and lend powerful insight into how to control your own credit today.

The Origins of Credit

Here’s how the story goes: Businessman Frank McNamara was having dinner at a New York City restaurant in 1949 when he realized he forgot his wallet. Rather than dine and dash, he came clean and asked if he could sign for the meal and pay later.

Though some say this legendary dinner never happened, everyone agrees McNamara founded Diners Club, the world’s first multipurpose charge card , in 1950. McNamara sold Diners Club memberships to friends and acquaintances willing to pay $3 for the “sign now, pay later” privilege at participating restaurants and hotels.

Related: Psychologists Explain How Money Matters Affect The Mind

Until that point, only individual stores extended credit to customers. If you couldn’t pay for, say, a dress or a new suit at the general store—and the owner knew you were good for the money—you could run up a tab and pay cash later. But the Diners Club card provided the benefit of credit at multiple locations instead of just one establishment.

And Then Came the “Big Four”

Of course, future entrepreneurs and banks wouldn’t let Diners Club monopolize the charge and credit market for long. Eventually, other cards came on the scene—most notably Visa, Mastercard, American Express, and Discover.

Visa . In 1958, Bank of America issued the BankAmericard—the first true credit card—to customers in California. While the original Diners Club card required payment in full at the end of each month, BankAmericard users could pay off purchases over time. In 1976, BankAmericard became Visa.

Fun fact: Visa is pronounced the same in every language—ideal for a now global corporation.

Mastercard . BankAmericard got a run for its money when a group of banks joined forces in 1966 to create the Interbank Card Association (ICA). In 1969, ICA created Master Charge: The Interbank Card, which became Mastercard in 1979.

Fun fact: Mastercard was the first payment card issued in the People’s Republic of China.

American Express . The American Express Company has been around since 1850, but it didn’t issue its first charge card until 1958. Like Diners Club, the American Express card had to be paid in full each month. That changed in 1987 with the introduction of the Optima card—the first true credit card by American Express.

Fun fact: Elvis Presley was one of the earliest American Express card members.

Discover . Discover is the newest major credit card network on the scene. Sears launched the Discover card in 1986, distinguishing it from the pack by charging no annual fees and offering higher credit limits than other cards at the time.

Discover was also the innovator of cash rewards on credit card purchases—back in 1986. At that time, Discover cardholders could earn rewards of up to 1% cash back on all purchases.

Fun fact: Discover Financial Services purchased Diners Club International in 2008.

How Credit Cards Have Changed Over Time

A lot has changed since McNamara’s legendary dinner. Take a look at some of the biggest shifts in the credit industry:

The Ubiquity of Credit

In the early decades, credit was curbed by restrictive interstate banking laws. But credit’s big breakthrough came in 1978, when the Supreme Court ruled to allow nationally chartered banks to charge out-of-state customers the interest rate set in the bank’s home state.

Credit expanded as a result, and today, the average American credit card holder has nearly four cards .

The Evolution of Fees

When Diners Club began, it made money by charging stores a 7% fee on all transactions. Today, credit card companies charge interest on debt, too, so they make money when you don’t pay your bill in full. Also, Diners Club used to charge nominal membership fees, but by the 1980s, many credit card companies eliminated annual fees to stay competitive.

The Advent of Rewards

The ’80s also brought tangible rewards for using credit cards instead of cash. Discover pioneered cash rewards, allowing cardholders get a percentage back on purchases charged. And in 1989, Citibank made a deal with American Airlines to give consumers reward points to use for future flights.

Today, consumers continue to use credit card rewards programs to earn cash or points for future purchases, including travel. In fact, more than 80% of credit card users have rewards programs associated with their cards.

How Different Cultures Pay for Things

Credit may be king in the United States, but other countries have varying relationships with money based on their unique culture, history, and economy.

While 67% of Americans and 81% of Canadians have at least one credit card, less than half of the people in Australia, Austria, France, and Germany have one credit card to their name. Outside of North America, people rely on debit cards far more than credit cards for electronic payment.

What’s more, in places like Austria and Germany, cash is actually the preferred method of payment —and they have packed wallets to prove it. It’s typical for Germans to carry more than $120 in their wallets, and for Austrians to hold nearly $150. Americans, on the other hand, usually carry less than $75 in cash.

Why Germans Pay Cash for Almost Everything

Believe it or not, a whopping 82% of all transactions in Germany are conducted in cash, compared to 46% of transactions in the United States. Why the reluctance to pay with plastic? For some, using cash makes it easier to keep track of money and spending. Cash also helps maintain anonymity and privacy—after all, you can’t track a cash-paying customer the same way you can trail credit card purchases.

But Germany’s preference for cash (and related fear of debt) probably has more to do with history than anything else. Remember, the World Wars wreaked havoc on the country’s economy. When Germans were forced to convert their reichsmarks to the new deutsche marks in 1948, they lost 93% of their savings . Painful memories like that tend to linger, influencing attitudes toward money in general.

How to Control Your Credit

Across all cultures, credit is a powerful tool that must be managed wisely. Here are some ways to control your credit to make it work for you.

Building Your Credit From the Ground up

It might sound enticing to pay for everything in cash (and thus stay out of debt), but most of us don’t have the cash flow to pay for college, buy a car, and purchase a home outright. Besides, even if you do have the cash to buy everything you need right now, when the day comes to apply for a loan, you’ll need a solid credit history to qualify.

(In the old days, lending was much more subjective .) If you’ve never had a single credit card or loan, your credit history is minimal, which means you pose a higher risk to lenders. In that way it pays to borrow, as long as you do so responsibly—spend less than you earn and pay your bills on time, every time.

It Pays to Pre-Finance

Of course, credit cards aren’t the only way to pay for purchases and build a strong debt payment history. Pre-financing (getting access to a sum of money in advance of a purchase), such as taking out a personal loan, is another option. When you apply for a loan, you’re requesting a specific amount of money from a lender and agreeing to repay that loan over a predetermined period of time.

Credit cards work differently. When you pay on credit, the credit card network (e.g., Visa) pays the merchant (e.g., Home Depot) for your purchases, and you pay the network back for your purchases each month. If you don’t pay your balance in full, you’ll be charged interest on future payments.

Recommended: Personal Loans – The Key Ingredient to Navigating Life’s Ups and Downs Like a Boss

Between the two options, pre-financing offers the benefit of lower interest rates and shorter loan terms, helping you get out of debt quicker. After all, if you don’t have a system in place to pay off purchases in a reasonable time frame, credit card debt can haunt you for a long time.

Think about it: If you’ve racked up $15,000 in credit card debt at an interest rate of 17%, and make a payment of $250 each month, it will take you 134 months (11+ years) to pay off your debt—debt that includes more than $18,000 in interest, by the way.

The Skinny on Credit Scores

Whenever you borrow money via a personal loan or use your credit card, your lenders and creditors send details of those transactions to national credit bureaus (Equifax, Experian, and TransUnion). That information is then used to assess your creditworthiness, which is expressed as a three-digit credit score that represents the risk you pose to lenders.

The higher your credit score, the less risky you are in their eyes. FICO scores are the ones used most often in lending decisions in the United States, with scores typically ranging from 300 (poor) to 850 (exceptional).

Your credit score comprises five categories, and each one has an impact:

•   Payment history: Late or missed payments drag down your score.

•   Amounts owed: High balances can hurt you; maxing out your credit cards is even more damaging.

•   Length of credit history: A long history can increase your score.

•   Credit mix in use: A healthy mix of credit cards, student loans, a mortgage loan, etc., can boost your score.
•   New credit: Opening several credit accounts in a short period of time can damage your score.

The Difference Three Digits can Make

Your credit score counts for a lot. It often helps creditors and lenders determine approval for credit, as well as the interest rate you’ll have to pay once you’re approved.

Typically, the higher your score, the lower the interest rate you’ll receive. Unfortunately, the reverse is also true, and the difference can be more than you bargained for. When it comes to car loans, for instance, a low score typically increases the cost of a $20,000, 60-month loan by more than $5,000 .

Giving Your Score a Boost

If your credit score isn’t where you want it to be, there’s good news: Scores aren’t set in stone. Try these tips to improve yours:

Do's and Don'ts of Credit Cards

Getting out of Credit Card Debt With a Personal Loan

Sometimes the problem is bigger than a low credit score. Unfortunately, some people get so deep into debt that it’s hard to find a way out on their own. But there’s good news on that front, too.

A personal loan allows you to consolidate high-interest credit card debt into one low-interest loan with a fixed monthly payment. (We’re not kidding about high interest: Currently, the average annual percentage rate for variable-rate credit cards is 16.38% .)

And, instead of transferring your debt to another credit card, you can get a loan that charges zero origination or balance-transfer fees. It’s no wonder refinancing your credit card debt with a personal loan is a smart financial move.

Related: Check out our Credit Card Interest Calculator to see how much interest you are paying on your credit card debt.

Plus, even if your score isn’t an accurate portrayal of how financially responsible you are, you might still qualify for a loan. SoFi, for example, looks at more than just your credit score, considering your employment history, debt payment record, and cash flow, too.

Clearly, credit cards have been a significant part of culture for most of our lives—and that’s not necessarily a bad thing, or bound to change any time soon. When managed effectively, credit cards are valuable tools to help you pay for the things you need and to sustain the life you want.

If you feel weighed down by credit card debt, it’s not too late to eliminate the burden—simply start taking steps to control your credit, rather than letting it control you.

Check your rate for a personal loan to consolidate high-interest credit card debt, and then share this article with others who would love to learn how to manage their credit better.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.


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4 To-Do’s Before Taking Out a Personal Loan

It’s the classic financial dilemma: you’ve got a home improvement project you’d like to start or maybe you have some unexpected medical bills, but you don’t want to dip into your savings to cover the expenses.

If you have good credit, a personal loan could be the answer. But there’s a lot to consider, especially if you’re paying off student loans while also trying to build a solid nest egg. Here’s a five-point plan to help you out:

1. Decide if a Personal Loan is Really the Ticket

In theory, a personal loan can be used for anything; in practice, though, it’s more suited to some uses than others. For example, major purchases that won’t offer a financial return, such as jewelry, a wedding or a European vacation, are not great uses for a personal loan.

When you take out a loan, your monthly payments will include interest. So avoid paying that interest by saving up for these types of purchases instead.

If you need to cover a smaller expense, like a new TV or espresso machine, using a credit card makes more sense than turning to a personal loan. Even though the interest rate on a credit card is typically higher than on a personal loan, you can pay off less expensive items off over a short period of time, accruing less interest in the long run—or even no interest. Remember, when you use a credit card vs a personal loan, you aren’t charged interest until 30 days after your purchase.

For larger expenses that double as investments in your financial or physical health, or in your career and home, a personal loan is a great solution. Use it to:

Consolidate Credit Card Debt

Average credit card interest rates range from around 13% to 23%, but personal loan rates can be much lower. Using a low-interest personal loan for credit card debt consolidation could save you thousands.

Make a Home Improvement

A personal loan is a great option for a home improvement project that’s just out-of-reach of your budget. And it could pay for itself down the road if you sell your home.

If you aren’t sure how much your renovation project will cost use our Home Improvement Cost Calculator to find out.

Pay for Large or Unexpected Medical Bills

Using a personal loan to pay health expenses is a smart alternative when the monthly payments attached are more manageable than the payments demanded by a doctor or hospital.

Pay for Moving Expenses to Advance Your Career

Expenses attached to career success are great investments. Moving to take a better job, for example, could be key to increasing your earning potential.

Once you know that a personal loan is for you, it’s time to be uber-responsible and do some pre-application homework. Take these steps:

Determine Exactly How Much you Need to Borrow

Your high credit score is valuable, and not something you want to damage. A solid loan strategy will help you maintain it. So, plan on borrowing only as much as you need, and know exactly what you can afford to pay monthly, so there’s no risk of overextending yourself.

2. Choose the Type of Loan you Want

There are two types of personal loans—secured and unsecured. A secured loan requires you to put up assets, such as property or stocks, as collateral, and it comes with a lower interest rate because it presents a lower risk to the lender.

But there’s a serious downside if you fail to make your monthly payments: You could lose the assets you’ve put on the line. An unsecured loan, on the other hand, is granted based on your credit history rather than on your assets.

3. Research Lenders and Ask the Right Questions

Choosing the right lender can save you thousands in interest payments and fees. So take a close look at your options to determine the lender and loan terms that best suit your needs. Once you’ve narrowed your choices down, ask lenders these key questions:

Can I Borrow the Exact Amount I Need?

Many lenders only offer loan amounts up to $40,000. But SoFi offers loans up to $100,000, so there’s a good chance you’ll get the amount you require.

What’s the Best Interest Rate you Can Offer me, and Can I Sign up for Automatic Payments?

Interest rates on personal loans can be over 30%. SoFi’s rates are some of the lowest—from just 5.95% fixed APR. Plus, if you sign up for Autopay, SoFi discounts your rate 0.25%.

What Loan Term Best Suits my Goals?

Personal loan terms can range from six months to 7 years, depending on the lender. SoFi offers 3, 5, and 7-year terms.

Are origination fees or prepayment penalties attached to the loan? Some lenders charge an origination fee of 1% to 6% of the loan just to process your application, and/or a prepayment penalty when you pay off your loan ahead of schedule. SoFi doesn’t do things like that —what you see is what you get.

What if I lose my job and can’t make payments for a few months? Missed payments could lower your credit score, incur late fees, or even involve collections agencies or a lawsuit.

SoFi personal loans include unemployment protection, allowing you to suspend your monthly payments for up to 12 months (though interest will continue to accrue). Plus, you’re eligible to receive job placement assistance in the meantime.

4. Crush Debt Faster

With your questions answered and your loan secured, you’re ready to embark on your project or pay some big bills. As you do, remember to stick to your budget and keep your spending in check. The last thing you want to do is take on more debt.

If you receive a raise or find yourself with a few extra bucks at the end of each month, think about making larger payments and applying the extra amount directly to your loan principal.

Get a year-end bonus? Use it to help pay off your loan months or even years early. Pro-tip: making a one-off payment on the day your auto-pay bill is due ensures that 100% of that payment goes towards paying down the principle of the loan.

With a low rate and monthly payment, a SoFi personal loan can help you pay off high-interest credit card debt, increase the value of your home, or even help you move forward (literally) in your career.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


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4 Smart Student Loan Repayment Strategies for New Grads

Congrats to the Class of 2016! May your lives after graduation be a reflection of everything you’ve worked so hard for – a successful career, stable finances, and much more. And if you’re one of the 40 million people in the U.S. with student loans, may your student loan repayment strategy help you eliminate that debt efficiently, so you can focus on your life’s journey.

Make no mistake – student loan repayment does require a strategy. Right now, it might seem as simple as picking a repayment plan and writing the first check, but the decisions you make today and during the course of the loan can affect how much interest you pay in the long run. A smart repayment strategy ensures that you don’t spend a penny more than is necessary.

Student loans may be a fact of post-grad life, but you can take four steps to put your repayment strategy on the right track:

1. Know Exactly What You Owe

Chances are you haven’t looked at your loan statements since you signed on the dotted line. So spend time getting reacquainted. Find your federal loans on the National Student Loan Data System (NSLDS) website .

If you’ve got private loans, gather your statements or check with your school’s financial aid administrator. Many private loans are also listed on the Clearinghouse Meteor Network . If necessary, pull your credit report ; all of your loans will be listed there.

Once you’ve tracked everything down, make a list of your loans and their important details—the type (e.g., Direct, PLUS, private), the balances, and the interest rate you’re charged for each. This information is key to intelligent planning.

2. Understand the Grace Period

Some student loans offer a grace period of several months (six, usually) after graduation before you’re required to start making payments. This can come in handy if you haven’t yet found employment or you’re taking a break before entering the working world.

Just remember that the interest clock is usually ticking on most unsubsidized and private loans during this timeframe. Those loans begin to accrue interest the moment they’re disbursed, and will continue to do so throughout the repayment period.

At that point, the accrued interest is capitalized and added to a loan’s principal, which means that you end up paying interest on a larger loan balance. Translation: higher interest cost for you.

Bottom line? Use the grace period if you need it, but consider making at least interest-only payments during this timeframe in order to save money long-range.

3. Do the Math

Most lenders will offer you a choice of repayment plans, allowing flexibility around the length of the repayment term (e.g., 10 years vs. 20 years), which impacts your monthly payment amount and total interest cost. While it might be tempting to choose the option with the lowest monthly payments, the long-term repercussions can be costly.

For example, let’s say you have a $100,000 student loan at a fixed 6.8% interest rate. If you pay it off in 10 years, your monthly payments will be $1,150, and the total interest will be $38,096. If you extend the term to 20 years, your monthly payments will go down to $763 but your total interest will spike to $83,201. If you can afford the higher monthly payments, you can save more than $45,000 in interest with the 10-year plan.

Recommended: Explore our student loan help center for tips, resources, and guides to help you navigate your student loan debt.

However, the most important factor is the ability to pay your monthly student loan bill, because missing or making late payments can have a disastrous effect on your credit. If you need to choose a lower payment option initially, do so.

But when you’re able, switch to a more aggressive plan or keep the longer term but pay more than the minimum each month to accelerate loan repayment. The sooner you do, the less interest you’ll pay and the faster you’ll be done with your loans.

4. Consider Refinancing

One of the best ways to save money on interest is by lowering your interest rate, and the only way to do that is through student loan refinancing. Refinancing typically requires the borrower to have a solid income and a track record of capably handling debt.

So if you’ve landed a great job and have a history of managing loans and credit cards responsibly, lowering your interest rate may be a cost-saving option for you.

Using the above loan example, let’s see what happens if you refinance that loan at a lower rate. By refinancing a $100,000, 6.8%, 10-year term loan to 5%, your payments would go down to $1,060, and your total interest would be $27,278. In other words, refinancing would mean lower monthly payments and a total savings of almost $11,000.

But before refinancing federal student loans, remember that fed loans offer benefits like potential loan forgiveness and income-based repayment plans.

These programs don’t transfer to private lenders, so it’s important to know whether they apply to your situation before refinancing. If you don’t benefit from these programs, and saving money is your priority, refinancing federal loans can be a cost-saving option.

When ready, do the math on refinancing your own loans using our student loan calculator.

Keep Your Eyes on the Prize

Arguably the most important aspect of any student loan repayment strategy is to keep a positive, can-do attitude. When starting out, each monthly payment can feel like a drop in an ocean. But stick with it, increase your payments when possible, and soon you’ll build momentum and experience some satisfying results.

While there’s no one-size-fits-all approach to determining the very best strategy, if you take time to understand all of your repayment options, you can create a course of action that works best for your situation, saves you money over the long term, and works toward paying off loans as efficiently as possible. An effective plan will allow you to focus on what’s really important: life after graduation.

See how SoFi can help you save money by refinancing your student loans.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.


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