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

February 03, 2017 · 11 minute read

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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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