By Ben LuthiThe History of Credit Cards
Quick Answer
Humans have used some form of credit since the 18th century, but credit cards in their current form can be traced back to the late 1800s.
Since their inception, credit cards have become a cornerstone of the American economy. According to Experian data, consumers carry $1.07 trillion in credit card debt, with an average credit card balance of $6,501.
While people have been borrowing money since ancient times, paying with plastic is a relatively new phenomenon. Credit cards trace their modern roots back to the late 19th century, but they didn't really take off until the 1950s. If you've ever wondered how the modern-day credit card began, here's a short history.
History of Credit Cards
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1865: Charge Coins
The first "credit cards" were actually coins made from metal or celluloid, which listed the issuing retailer's information and an account number. -
1914: Metal Money
Western Union introduced one of the first metal charge plates. By the 1930s, many retailers issued their own form of metal money, commonly known as Charga-Plates. -
1934: Air Travel Card
The Air Transport Association and American Airlines introduced the Air Travel Card as a way for passengers to book immediately and pay later. Within a decade, 17 airlines offered the card. -
1946: Charg-It Card
A Brooklyn-based banker created the first bank card to drum up new business. Customers could use the card with select merchants and be billed later. -
1950: First Modern Credit Card
Diners Club rolled out its card, commonly recognized as the first modern credit card, available for use at several retailers. -
1969: Magnetic Stripes
First attached to a credit card by an engineer at IBM, the magnetic stripe gave credit cards fraud protection that didn't previously exist. -
1984: First Credit Card Rewards Programs
Diners Club created the first rewards program, Club Rewards. -
1994: EMV Chips
Europay, Mastercard and Visa partnered to develop EMV chip technology in Europe to provide an extra layer of security beyond magnetic stripes. -
1995: First Contactless Payment
The first contactless payment card was introduced in Korea. -
2008: Mobile Wallet
Mobile wallets began with the Apple app store.
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Early Forms of Credit
For thousands of years, merchants have used credit to help their customers finance purchases.
Some of the earliest written examples of a credit system include the Code of Hammurabi, named after the man who ruled Babylon (present-day Iraq) from 1792 to 1750 B.C. These laws established rules for loaning and paying back money, as well as how interest could be charged.
Historically, a loan was a financial agreement between a single borrower and a single creditor or merchant for a single transaction. Over time, some customers gained the option to "run a tab" with an individual merchant—effectively a revolving line of credit that can be continuously borrowed against and has no fixed payoff date. This is the equivalent of a modern store credit card that's not part of a larger payment network.
Modern Credit Cards
With charge coins, metal money, the Air Travel Card and the Charg-It Card paving the way, the first modern credit card was introduced in 1950. Over the next few decades, the industry expanded with other notable credit cards. Here are some of the trailblazers.
Diners Club Card
The first modern-day credit card was born out of happenstance: Businessman Frank McNamara forgot his wallet while dining out. While his wife bailed him out, McNamara returned a year later with a small cardboard card, the first iteration of the Diners Club card.
The Diners Club card was the first general-use charge card. Cardholders could use it at hundreds of restaurants, hotels and car rental agencies, and pay their bills in full at a later date each month. Users would pay $5 annually for the service, and merchants would pay a 7% fee on charges.
American Express Cards
American Express, which had already been in business for more than a century, introduced its first charge card in 1958. The first transaction was processed using handwritten forms that the merchant needed to mail to the company. Just a few years later, the company began issuing embossed plastic cards.
BankAmericard
Also in 1958, Bank of America launched BankAmericard, the first consumer credit card that allowed cardholders to revolve a balance from month to month. The BankAmericard brand was later spun off the national bank and renamed Visa in 1976.
Master Charge Card
In 1966, a network of banks formed a joint venture called the Interbank Card Association, releasing a card named the Master Charge. Later, the company absorbed the Everything Card by First National City Bank—now Citibank—and eventually became known as Mastercard in 1979.
Discover Card
In 1986, Sears, Roebuck & Co. launched the Discover Card, announcing the card in a Super Bowl commercial. The card offered one of the first cash back rewards programs. Discover was spun off as a separate company in 1993.
The Evolution of Credit Card Technology
We've come a long way from the days of using metal coins and plates to make charges. Here's a quick summary of some of the most impactful innovations in credit card technology that improve both convenience and security:
- Magnetic stripes: Developed in the 1960s, magnetic stripes with encoded card information would become the standard for many decades. With the introduction of more secure technology, however, card issuers are starting to phase out the use of magnetic stripes.
- Card verification value (CVV) codes: CVV codes are three- or four-digit codes printed on credit cards that add extra security for transactions where the card isn't present—for example, online purchases. Mastercard was the first to add CVV codes to its cards in 1997, and other payment processing networks followed suit over the next few years.
- EMV chips: Embedded EMV smart chips allow for encrypted, two-way authentication between a merchant's credit card terminal and the payment processing network. The technology also uses one-time-use tokens that are unusable by identity thieves. EMV technology was first developed in the 1990s and enjoyed widespread adoption in Europe shortly afterward. However, it didn't become the standard in the U.S. until the mid-2010s.
- Near-field communication: NFC for short, near-field communication uses radio waves to allow two devices to communicate with each other wirelessly when they're physically near to each other. As with EMV chips, data transmitted via NFC is encrypted to prevent fraud. The technology is used by digital wallets like Apple Pay and Google Pay, as well as contactless credit cards with a tap-to-pay feature.
Wireless payment technologies are rapidly integrated into smartphones, watches and other wearable platforms. While it's unclear what the next step in credit card technology looks like, some foresee a day when biometric authentication allows consumers to charge purchases using a fingerprint or retinal scan without having any object that contains their account information.
Key Credit Card Legislation
The early history of credit cards was somewhat of a Wild West because few regulations existed for the fledgling industry. Between 1968 and 2009, Congress passed several major laws that helped regulate the credit card industry, along with other forms of credit.
Here's a quick breakdown of each regulation:
- Truth in Lending Act (TILA): TILA, enacted in 1968, created sweeping regulations to protect consumers against unfair credit card and billing practices. Most importantly, it requires lenders to provide consumers with accurate loan cost details.
- Fair Credit Reporting Act (FCRA): The FCRA was passed in 1970, requiring credit card companies to report accurate information to the credit reporting agencies.
- Equal Credit Opportunity Act (ECOA): Passed in 1974, the ECOA prohibits credit card issuers and other lenders from making credit decisions based on the applicant's race, color, religion, national origin, sex, marital status, age or usage of public assistance, among other things.
- Fair Credit Billing Act (FCBA): Another regulation enacted in 1974, FCBA created billing practices for the industry, particularly when it comes to acknowledging billing complaints and investigating errors. The law also limits a card user's liability for unauthorized purchases.
- Schumer Box: An amendment to the TILA, the Schumer Box legislation requires credit card companies to use a standardized table summarizing a card's rates and fees, making them easier to read and compare.
- Credit Card Accountability, Responsibility and Disclosure Act: The Credit CARD Act was passed in 2009 as a comprehensive amendment to the TILA. The law limits how and when credit card companies can charge interest and fees, provides a minimum grace period for interest-free in-full payments and creates protections for consumers under the age of 21, among other provisions.
Invention of Credit Scores
The first standardized system for evaluating a consumer's creditworthiness was introduced by the Mercantile Agency in 1841. However, the system was considered flawed due to subjective judgments it made about borrowers
As the consumer credit reporting industry grew, attempts were made to quantify credit report information in an objective way. In 1956, Bill Fair and Earl Isaac founded Fair, Isaac and Co. Now known as FICO, the company developed its first credit scoring system in 1958. However, it wasn't until 1989 that the FICO® ScoreΘ started being used by lenders to evaluate borrowers.
The score quickly gathered steam to become the most widely used credit score, utilized by 90% of top lenders, according to FICO. It's also undergone several updates to provide more fair and predictive information about consumer credit profiles.
In recent years, the VantageScore® credit score credit score—developed in a joint venture by Experian, Equifax and TransUnion—has emerged as an alternative credit scoring model. Additionally, some financial technology companies have pioneered the use of nontraditional credit information, including income and expenses, as well as other factors.
The Bottom Line
While credit cards can trace their roots back more than two centuries, the payment method we know today has only been around for 74 years. Since then, legislators have created various consumer protections for credit card users, and credit card companies have developed an array of incentives for consumers to use their products for everyday spending.
While credit cards offer convenience, security, rewards and perks, they also generally carry a higher interest rate than loans and other types of debt. What's more, maintaining a high balance on one or more of your credit cards can damage your credit score if it raises your credit utilization ratio. That said, using a credit card responsibly can help you build credit.
To take advantage of the benefits credit cards have to offer while minimizing their potential downsides, make it a priority to maintain a low balance and to pay that balance in full each month. You can also monitor your credit regularly to understand how your credit card usage impacts your credit score and get insights on how to improve and maintain good credit.
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About the author
Ben Luthi
Ben Luthi has worked in financial planning, banking and auto finance, and writes about all aspects of money. His work has appeared in Time, Success, USA Today, Credit Karma, NerdWallet, Wirecutter and more.
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