General-purpose credit cards, unknown in the United States before 1958, have become an essential feature of commerce. Credit card purchases totaled more than $4 trillion in 2007, and total indebtedness on credit cards stood at $880 billion. Revenue from interest, cardholder fees, penalties, and merchant interchange fees made the institutions responsible for issuing credit cards among America’s most profitable for investors. Credit cards stimulated personal consumption but also encouraged individuals to incur unprecedented levels of debt.

Credit card buying has contributed to one of the most profound social and cultural revolutions of post-World War II America. Credit and debt have been integral parts of the American economy since colonial times, but the general-purpose bank credit card, allowing individuals to obtain goods and services from multiple retailers on credit, dates from only 1958.Credit cards

A Puritan bias toward thrift that stigmatized Consumer debtconsumer debt characterized American attitudes in the nineteenth and early twentieth century. For the sake of convenience, merchants allowed regular customers to record purchases in an account book, paying at the end of the month. In 1926, Sears, Roebuck and Company went a step further, issuing an embossed metal charge card that could be used to make a purchase at any Sears store nationwide or from any Sears catalog. Other retail chains followed suit. Such store cards rarely charged interest or fees, counting on customer loyalty to offset costs. Stores also offered installment-sales contracts for big-ticket items such as appliances. The premium a person paid for an installment-sales purchase was typically modest, in contrast to modern-day rent-to-own agreements, which can easily double the price of an item.

In 1950, an association of New York restaurants catering to business customers began issuing the Diners Club card, good at any participating establishment. This was a charge card rather than a credit card, requiring that balances be paid in full within thirty days. Over the years, Diners Club expanded to other aspects of travel and entertainment within the United States and abroad. Diners Club still operates as a subsidiary of MasterCard.

Credit cards, such as these depicted outside a New York parking garage in 2006, are used by many consumers.

(AP/Wide World Photos)

The first national general-purpose charge card was the American Express Green Card, issued by American Express in 1958. The idea of a general-purpose charge card arose naturally from the company’s existing traveler’s check and international money-transfer operations. Also in 1958, Bank of America in Fresno, California, began issuing BankAmericard, a credit card. In contrast to Diners Club and American Express, Bank of America targeted its BankAmericard toward middle-class consumers rather than business travelers.

In 1965, Bank of America expanded its operations outside California. Banks in other states operated Bank of America’s card services as a franchise. In 1977, BankAmericard’s licensees banded together to form Visa. Meanwhile, in 1967, a group of rival California banks had begun offering MasterCard as both a charge and credit card. Sears, Roebuck launched the Discover card, chronologically the last of the major bank credit cards, in 1985.

Credit card usage in the United States exploded around 1980, when companies started aggressively marketing cards outside the original middle-class base. In the twenty-first century, total purchases using credit and debit cards amount to trillions of dollars annually. Aggregate credit card debt in the United States rose from $55 billion (15.8 percent of total consumer debt) in 1980 to $239 billion (30.2 percent) in 1990 and to $880 billion in 2007. Revenue generated by interchange fees (charged to service providers), interest, penalties, and arrangements with corporations providing consumer services make the parent companies of the major credit cards in the United States among the fastest-growing and most profitable corporate entities in the world.

Marketing Marketing;credit cardscredit is a huge business in its own right. Credit card companies direct-mailed 5.3 billion credit card solicitations to Americans in 2007, roughly 20 per adult. Students, people who have recently filed for bankruptcy, retirees, and those whose credit reports show recent defaults receive a disproportionate share of solicitations, while low-income wage earners with indifferent credit ratings and convenience users with long histories of prompt repayment receive very few. Credit card solicitations and billing statements constitute about 7 percent of the U.S. Postal Service’s letter mail volume. Card issuers also advertise heavily in the press and on television. They have found that unsolicited e-mail is ineffective and avoid it, but they have a high level of presence on the Internet as Web site sponsors.

A typical solicitation touts personal convenience, associates modern technology with professional success, and encourages emotional spending. It may appeal to altruism, either by picturing the cardholder bringing joy to friends and family through spending, or by embedded giving, that is, contributing some small fraction of total purchases to a worthy cause. A very successful partnership between Discover and the Smithsonian Institution raised funds for the Smithsonian’s one-hundredth anniversary (in 1999) through a card ironically bearing the image of Benjamin Franklin, a great proponent of thrift.

Colleges and other nonprofits derive substantial income from credit card companies in return for access to clients, who are subjected to carefully tailored campaigns. Some colleges go so far as to combine a bank credit card with a student body card, allowing students to charge tuition and fees–and pay credit card interest rates on the balance. Cash-strapped nonprofit hospitals routinely include an application for a medical credit card with admissions paperwork. On discharge, the uninsured individual discovers that the medical bill is subject to the high interest rates and lack of flexibility characteristic of credit card debt.

Bank cards offer a bewildering array of incentives, including cashback offers, frequent flier miles, travel insurance policies, and discounts at certain retailers, as well as complicated rate structures giving some customers low interest rates. Despite provisions of the Truth-in-lending laws[Truth in lending laws]Truth in Lending Act in its various iterations, credit card solicitations continue to wave the rewards carrot in a customer’s face while carefully hiding the penalties stick in a mass of contractual fine print. Most contracts offering low interest rates provide for reset on default to rates averaging 18 to 19 percent but potentially as high as 37 percent. For a number of years, many contracts also included a universal default clause, whereby failure to pay the minimum on one card triggered the higher rate on all cards, even those issued by different companies. Facing consumer outrage and a cry for federal regulation, the major credit card companies have since backed off on universal default clauses.

Credit card buyers may be roughly grouped into two classes: convenience users, who usually pay their balances in full at the end of the month and pay very little in interest and fees, and revolvers, who use their cards to borrow money longer term and pay heavily for the privilege in high interest rates and penalties. Until the early 1980’s, companies issued credit cards conservatively, and the majority of borrowers were convenience users. Later they discovered that revolvers generated more profit and began aggressively marketing cards to low-income and less creditworthy individuals, such as students. Both credit card buying and credit card indebtedness rose steeply as a consequence. Despite this, nearly half of cardholders could be classified as convenience users in 2007, and although the average credit card debt per American household was $8,940 in 2004, the median was only $1,900, another indication that the system works favorably for large numbers of people.

Some economists see the subsidy of convenience users by revolvers as an important factor in the widening gap between the rich and poor in the United States, but this is only partly true. The ability to budget, matching expenditures to income, is only weakly correlated to absolute income. The critical factor in credit card debt is a cognitive disconnect between earnings and consumption. The people most vulnerable to the credit card’s buy-now, pay-later pitch are those with fluctuating, unpredictable incomes, and young people just embarking on careers. Successive generations have shown themselves more ready to incur nonmortgage consumer debt, partly in response to changing attitudes about financial obligations and the morality of borrowing, and partly in response to the growing difficulty in making ends meet in an economy characterized by stagnant entry-level salaries, poorer job security, skyrocketing housing costs, and unstable families. Using a credit card to avoid facing the consequences of problems caused by any of these leaves a person drowning in debt.

Credit card debt is generally unsecured consumer debt and can be discharged in bankruptcy. In 2005, credit card companies, faced with growing levels of default involving tens of thousands of dollars worth of debt, lobbied for changes to bankruptcy laws intended to discourage people from filing.

Some of the impetus came from a weakening Housinghousing market. To minimize default on high-interest income-generating loans, credit card companies encouraged people to take out low-interest home equity loans to pay off their credit cards. When housing prices plateaued in 2006 and then began to decline, this source of credit dried up. An unsecured loan, which would have been discharged in bankruptcy, became a secured loan, contributing to home foreclosure. Some of the impetus behind aggressive marketing of credit cards to students lies in the assumption that the student (who has minimal current income and unknown job prospects) will spend extravagantly and then take out a low-interest, nondischargeable student loan to pay off the credit card.

One area in which credit cards have had a positive impact is small business. As of 2000, credit cards had supplanted direct bank loans as the top source of start-up capital for small entrepreneurial businesses. In contrast, loans from the United States Small Business Administration accounted for only 2 percent of total volume. Information technology companies, which are not highly capitalized, have been notable beneficiaries. Some of these have been highly successful. Some experts suspect that banks may have curtailed business loan availability to enable them to take advantage of more lucrative credit card contracts, especially when the business applying for a loan has some track record as a going concern.

In the twenty-first century, an increasing proportion of credit “card” purchases take place over the Internet. These transactions do not generate interchange fees and involve a higher proportion of debit card and convenience users than transactions at conventional stores. The convenience of these electronic transactions stimulates commerce generally but does not generate much revenue for the issuing financial institution.

• Bertolo, Giusseppe, Richard Disney, and Charles Grant, eds. The Economics of Consumer Credit. Cambridge, Mass.: MIT Press, 2006. A multiauthored work covering Italy and Great Britain as well as the United States.
• Evans, David S., and Richard Schmalensee. Paying with Plastic: The Digital Revolution in Buying and Borrowing. Cambridge, Mass.: MIT Press, 2005. Includes a good history of the development ofcredit cards, with clear explanations of all levels of the process of using credit cards from the individual consumer to global investment markets.
• Kamenetz, Anya. Debt Generation: Why Now Is a Terrible Time to Be Young. New York: Riverhead Books, 2006. A young journalist examines the impact of credit card and student loan debt on young people in an era of declining career opportunities.
• Manning, Robert D. Credit Card Nation: The Consequences of America’s Addiction to Credit. New York: Basic Books, 2000. Has a consumer bias; traces the history of credit cards and their impact on society.
• Sullivan, Theresa, Elizabeth Warren, and Jay Westbrook. As We Forgive Our Debtors: Bankruptcy and Consumer Credit in America. Oxford, England: Oxford University Press, 1989. Based on a large study of consumer bankruptcies, this work focuses on economic trends and has a good treatment of women’s issues.
• _______. The Fragile Middle Class: Americans in Debt. New Haven, Conn.: Yale University Press, 2000. This volume by a consumer-oriented, socially conscious group of economists explores the impact of skyrocketing debt, including consumer debt, on American families.

Banking

Bankruptcy law

Catalog shopping

Diners Club

Drive-through businesses

Interest rates

Internet

Retail trade industry

Sears, Roebuck and Company

Small Business Administration

Truth-in-lending laws