Using a credit card is now common practice. In the United States alone, the Federal Reserve reported that credit card debt in 2017 topped $1 trillion, and this number continues to grow each year.
While credit cards have become a part of everyday life, they weren’t even in existence until the 1950s.
In the early 20th century, cash was the preferred payment method for nearly all transactions. There were, however, some large department stores and gas stations that offered charge cards customers could use to pay for their purchases. These cards could only be used at the stores of issue and were mainly issued to encourage customer loyalty.
The First Supper
There are numerous stories about how the idea of the modern credit card came about. The most popular one, however, recalls an incident in 1949 involving a man named Frank X McNamara and his two friends.
McNamara, who headed the Hamilton Credit Corporation, was with his attorney, Ralph Schneider, and longtime friend Alfred Bloomingdale at a restaurant in New York. They were discussing one of McNamara’s customers who had lent his charge cards to his poor neighbors. They had to pay him back the original cost of their purchases and some extra money. Unfortunately, many of his neighbors could not pay him back.
After the meal, McNamara reached into his pocket and realized that he had forgotten his wallet. Luckily, he was able to call his wife to pay for his tab. Feeling embarrassed, he resolved to never let this happen again.
Creating A Middleman
Merging two concepts from that night, McNamara thought of having a credit card that could be used at multiple locations. Instead of bringing multiple cards, people could just use one card to pay for their purchases. He discussed this idea with his two friends, eventually resulting in the creation of a company called Diners Club in 1950. The Diners Club was going to be a middleman between companies and their customers – the company would offer credit to individuals, then bill these individuals and pay the companies.
In order to make money, Diners Club charged merchants 7% per transaction while cardholders would be charged an annual fee. They initially focused on salesmen who entertained their clients at restaurants, hence the company’s name. The first cards – then made of paper – were issued in 1950. Despite initial difficulties, the idea caught on. By the end of the year, more than 20,000 people had a Diners Club credit card.
Continued Growth
By its second year, Diners Club was profitable. McNamara, who thought that credit cards were just a fad that would eventually die out, sold his shares in the company for over $200,000.
However, Diners Club successfully attracted more customers in the years that followed. By the late 1950s, the company had two new competitors – American Express and BankAmericard (later known as VISA).
Nearly 70 years later, the credit card industry continues to grow at an extraordinary rate.