In this modern trend, credit cards are part of almost everyone’s life and many people have enthusiastically been wanting to find out how these cards came into existence.
Are you one of them? Have you been wondering who invented credit cards and why? Have you been asking yourself how the first cards worked? Well, you are in the right place, just get yourself a comfortable position and read-on.
How Did Credit Cards Work in the 90’s?
To begin with, what is a credit card?
A credit card is a type of credit facility (normally plastic) provided by Banks, financial companies and stores that allow customers to borrow funds within a pre-approved credit limit hence enabling them to make transactions on goods and services.
The card usually has a credit limit which is determined by the bank basing on factors like the income of the card user and the credit score.
The card normally has details of the user for example the card user’s name, signature, credit card number, CVC code, the expiration date and so on.
Who qualifies to get a credit card?
The minimal requirement of one to apply for a credit card is that they should be 18 years and above. However applicants 18-21 are required to show proof of income (for instance a job) or they should have a cosigner according to the CARD act of 2009.
How did credit cards work then?
As we all know, technology was limited back in the days and the procedure of using credits cards varied. Many retailers in the US accepted cards using the knuckle-buster; a device operated by hand.
The machine took a carbon copy impression of the credit card user and then generated a receipt for the user to sign, the clerk/merchant would check for the card number on the sheet of stolen or lost cards for cases of security.
If the card number appeared on none of the lists, the merchant would then go ahead with the transaction and if the sale accounting for $30 or more, the clerk would call MasterCard or Visa for phone authorization and the transaction would then proceed.
The card would go on the embosser and the merchant would pull the roller to get the card imprinted onto the form and the clerk would compare the two signatures.
The clerk would then take off the binding slip holding the three copies if they were fine.
A copy would be given to the customer, another to the merchant and the other to the card issuer.
The Evolution Of Credit Cards
The birth of credit cards
The most common way of exchange amongst traders in the early years was barter trade but as time evolved, the merchants and traders adopted to exchanging goods basing on credit later in the 1880s. The traders used credit coins and paper as a temporary means of exchange and this idea spread very widely, early paper store credit cards were introduced by 1885 but the credit was limited to people within a specific geographical location.
The metal coins were provided by merchants like taxi companies and stores as a form of payment, the coins were stamped by an image and account number that identified the user.
When a person used the coin, the merchant would look for the paper file linked to the corresponding coin number, review the credit limit and then authorize the transaction.
By 1914, Western Union gave selected customers metal plates that allowed them defer payments until the agreed time and some oil companies created similar courtesy cards; these allowed customers to refill and repair their vehicles at the stations.
Charga-plates which were metallic in nature were then developed in 1928; these cards were more personalized and embossed on them was the card holder’s personal info with their signature at the back, these cards also fit in a person’s wallet.
The charga-plates were circulated between 1930’s and 1950’s primarily by merchants and specifically for use in their stores.
The American Airlines Air travel card together with a charge plate were issued to customers as a way of making payments for travel tickets in the year 1936, this gave its customers a 15% discount and it continued evolution with time.
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In 1940, air travel credit cards were introduced and these were to strictly offer credit facilities to people purchasing air tickets and in 1949, a man called Frank McNamara happened to dine at majors cabin grill in New York and noticed he’d forgotten his wallet home, he was able to resolve the situation but never wanted it to happen again.
As a result, he and his business partner (Ralph Schneider) released their first cardboard Diner’s club card in 1950.
It was called a credit card but as of today’s standards it was more of a charge card and it was intended for customers who wanted to pay back their travel and entertainment purchases abit later.
This was the first card in history to be accepted by multiple merchants within a wide geographical stretch.
Diner’s club became popular and within a year after the launch of the card (1951), the club had about 42,000 members and the card acceptance in the US continued spreading to more cities.
Being the first universal credit card, Diner’s club is hailed for having brought to life the virtual-money concept and it was accepted in various countries like Cuba, Mexico, Canada, and UK by 1953.
The first bank system
John C. Biggins who was a New York banker introduced the first bank card system in 1946 which was referred to as Charg-It.
Similar to the previous cards, the Charg-It card would be used to repay retailer and the issuing bank would reimburse the retailer and then seek payment from the customer.
This card however worked at only stores which were near the issuing bank and the merchants would need to drop off original sales to the bank so that it could collect the debt.
More credit card issuing companies
After the visible success of Diner’s club credit card, other banks and financial systems worked hard to get into the system and as a result, more credit card facilities were introduced.
Below are some of them with a detailed explanation of how they worked; –
American express created its own credit program in 1958 and like the original Diner card, its main intention was to fund travel and entertainment expenses.
The user was expected to clear their bills by the end of every month. In 1959, the American express introduced the first plastic card. The issuing bank then launched a corporate credit card program meant for commercial customers in 1966.
Bank of America introduced the very first general-purpose credit card in 1958. The ‘BankAmericard’ card was initially made of paper but after sometime, it was changed into a plastic card. The card’s operation was quite similar to the credit cards being used today.
The card was allowed by almost all merchants then and it had a credit limit of $300, in 1966 the Bank Of America licensed different banks to issue its credit cards and therefore increasing the card circulation within the nation.
In order to strengthen the network, Bank of America joined a group of banks.
Collectively, these formed The National BankAmericard which was later renamed Visa in 1976.
A small group of East-coast banks formed an inter-bank card association (ICA) in 1966. This was done in order to compete with California based BankAmericards and through this association; Master charge was introduced.
This organization revolutionized the payment authorization process and a central computer network that connected merchants to using Banks was established in 1973.
The name Master charge was changed to MasterCard later in 1979.
Dean Witter Financial Services Group Inc. which initially was Sears, Roebuck and Co, started a card issuing network known as discover.
The early discover card purchases were made by Sears’s employees at stores in Atlanta and San Diego in 1985 with an aim of testing the system.
The discover credit card was publicly launched on a television commercial during Super Bowl XX, in 2008 discover acquired Diners Club international in order to boost on its global card reach.
Note: As credit cards continued spring up into the lime light, certain laws were implemented to ensure that all legible citizen benefited.
Some of the laws that were implemented were;-
- The fair credit reporting act
This was passed in 1970 in order to give all credit card users rights on what actions they would take regarding their credit reports.
With this legislation, if you a card issuer refused to grant your request of getting a credit card you were free to request for reasons and also view your credit report free of charge and in addition you would opt out of unsolicited credit card offers.
- The equal credit opportunity act
This act was passed in 1974 and it was to prohibit creditors from discriminating against people of a given race, sex or marital status. Women and black people were the ones largely at risk.
- The fair debit collection act
This was act was passed in 1977 to prevent abusive debt collection practices. People who had failed to pay credits on time were usually the victims.
The Invention Of Magnetic Stripe
Before the invention of magnetic stripes, there was a black strip on the back of the credit card and this was invented by an IBM engineer called Forest Parry in 1960.
This magnetic tape first held details for CIA identity cards and it was relatively an inexpensive way of storing account information for point-of-sale terminals and payment cards.
The introduction of the magnetic stripes was a great achievement in the credit card evolution since it marked the start of computerized transactions, replacing the manual processing.
The magnetic stripes were adopted as a U.S standard of payments and after two years, it became an international standard.
Difference between the early credit cards and the recently used credit cards.
- Credit cards back in the days were limited to airlines and hotels but as of now, average salaried people and small business owners qualify to apply for credit cards and the credit cards can also be used for various transactions in malls, hotels, supermarkets, airports, movie halls and so on.
- Today’s cards are more secure since they are well protected with double authentication and other safety features which was not the case then. Anyone could access cards with signatures on carbon paper and this made robbery in malls, stores and other financial facilities so common then.
Advantages of using a credit card
1. No need for one to carry cash
The fact that credit cards are accepted almost everywhere, there is no need for an individual to carry cash around. Simply use your credit card to cover your expenses and pay later at your convenience.
2. They are widely accepted.
Credit cards are the most common form of payment in the world today and therefore they are accepted almost everywhere around the globe.
The cards can be used for making international bookings at airlines, petroleum stations, hotels, stores, and many other facilities hence making traveling around the world convenient.
It should however be noted that using credit cards in foreign countries can be so costly since the forex exchange rates tend to be higher and the foreign transaction fees charged are higher.
3. There is an ease in cash withdrawal.
Most credit cards allow you withdraw money anytime that need arises and therefore creating ease for the user though a withdrawal fee is usually charged while repaying the debt.
4. Interest-free periods
Some credit card issuers offer their customers an interest free period and at the time, the user is not subjected to any additional expenses.
5. Help save time during emergencies
Credit cards can be used in some hospitals to cover medical bills more especially in times of emergencies and therefore one could be treated without making any monetary payments but rather considering the credit card.
6. Maximal use of credit cards Improves on one’s credit score
The more a person uses his/her credit card rightfully and pays all the bills in time, they become more legible to use the facility.
The credit limit offered to the user would then have greater chances of increasing and hence allowed to secure more loans in the future.
7. Hustle free shopping
Provided your credit card issuer is up to standard, you can order and pay for as many items as possible from malls, stores or even hotels at the comfort of your home.
You need not travel to crowded malls and collide with people while making purchases. The credit cards have you covered with working smart.
Whenever one swipes their credit card, the money is deducted from their credit card limit and not their bank account.
Disadvantages of using credit cards
Despite the goodness in using credit cards, there are some cons that a person should be aware of before signing for a new credit card.
The following are some of them; –
- Credit card users incur a risk of hackers. The most significant hack was experienced in December 2013 when more than 40 million credits and debit account numbers were stolen from target’s payment database.
- Card skimmers also take advantage of the credit card market. They do so through copying card information stored on the magnetic stripes on the credit card and after, replicate cards and use them as quick as they can before being noticed by the concerned officials.
Using credit cards is one of the most effective ways of managing finances today since they offer great financial freedom more so if judiciously used.
With the rapid technological advancements however, we expect to get more sophisticated ways of managing our financial accounts.
The idea of credit cards might not seem to be going anywhere, but the tangible cards might cease to exist due to the increased adoption to mobile/ digital wallets.
Analysts also predict that we might resort to biometric payments like the retinal scans, finger print, and face recognition in order to have access to our credit accounts!
How did credit cards work before computers?
Early credit cards were just paper, metal or plastic cards that were simply a form of identification that showed that a person had got a credit from a certain bank or organization.
Credit cards came into existence after computers were invented but even so, required little or no technology at all.
What is a credit card limit?
Credit limit is the maximum amount of money a credit card user is supposed to spend and it is determined by the amount of money the user receives as income on their bank account.
What is a credit score?
This is usually a 3-digit figure that indicates whether or not one is a credit-worthy candidate. It is a major factor considered while determining your credit limit.