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Financial Literacy

Financial Literacy

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How Credit Cards Came to Be

Part of the story of credit cards starts with a car: Ford’s Model T. Racing along at its top speed of 40 mph, it guzzled gas at 15 mpg. It was a revolution— Americans were now whizzing around everywhere (not urinating on bushes; rather, they were driving everywhere…) and they needed gas wherever they travelled.

Filling stations popped up all over: Standard Oil, Amoco, Shell, Texaco, all the big oil names. And with them, gas cards that let speedsters pay with credit wherever they sped. (Credit is paying later for something you buy now.)

In 1939 Standard Oil of Indiana did the first-ever blitz of credit card offers…they sent out 250,000 cards to strangers, basically anyone with an address and (hopefully) a heartbeat.

In the 1940s, the newest technology—aluminum charge plates called Charga-Plate—edged out those early paper cards.

Department stores were in the race, too. In the 1920s, during the Great Depression, the top dog at a top NYC department store (nowadays known as Macy’s) decided to offer a special Pay When You Can deal to its best customers. He wanted to keep customers buying, even though times were tight.

Those first loyal shoppers used metal coins, the great-great grandmas of today’s plastic card. They became status symbols and the department stores got pretty creative with them. This 1921 charge coin from Lit Brothers (a department store in Philly) was designed to hang on a keychain. And Gimbel’s (the world’s largest department store chain at the time) issued theirs in convenient leather carrying-cases.

Until 1950, a charge card could only be used at the company whose name was on it. (After all, a store couldn’t let just anyone have credit; the store was the one who would lose out if a card user stiffed them. These days, if a deadbeat doesn’t pay, it’s the credit card company left holder the bag.)

Enter Frankie McNamarra, a savvy New Yorker who was always on the look-out for ways to make money using money. One night after finishing dinner at a famous NYC restaurant, he realized he’d left his wallet at home. After an embarrassing wait, his wife came to his rescue with some cool cash, and he had come up with the idea—the giant lightbulb variety—of a charge card that could be used at lots of different places. And Diners Club was born—a card that could be used at a couple dozen NYC restaurants. It was the first “universal” charge card. Soon every restaurant accepted Diners Club.

As Diners Club added more and more restaurants and hotels and other travel related companies, American Express saw how much money Diners Club was raking in and got into the game with its “member cards.” American Express still dominates the world of travel and entertainment cards.

Both AmEx and Diners Club cards were charge cards. Users had the pay off the full amount they owed each month (unlike credit card that let you can carry a balance as long as you make the minimum payment each month). Even billionaire shipping magnate Captain Moneybags had to. He who charged thousands every month on his American Express (member since 1959):

• 69 restaurant meals
• 230 gallons of yacht fuel at the Marina
• 8 first class tickets to Europe
• 21 nights at 5-star hotels in 3 different cities
• And on and on

So when his $18,000 bill arrived in the mail, his secretary immediately wrote the check and mailed it in. And Captain Moneybags started racking up the charges all over again.

Here, since Captain Moneybags didn’t have a balance on his card (wasn’t borrowing money, just wanted the convenience of a charge card), American Express wasn’t making money by charging him interest. Their game was to charge the restaurant and the marina a small processing fee (2%). So they made $270.

Here’s the math on this:

Captain Moneybags spent - $18,000
Less the processing fee of 2.0% -  $360
The restaurant got = $17,640

The processing fee of 2.0% - $360
Less what the card processing company got (0.5%) - $90
American Express made this (1.5%) = $270

But what about Bob Bluecollar? Bob’s a regular working guy. He’s a whiz with small engines, able to repair any lawnmower placed before him on his worktable, blindfolded. But he makes a lot less money than Fullerton. And when he found a $1,000 surprise (the bad kind) in his mailbox box last month (evidently, his wife, Shirley had gone a bit overboard at the local Costco), Bob was floored. He only had the cash in his bank account to pay half that without hitting overdraft limits and then big fines with his bank.

So with red danger-danger lights flashing, he left the balance on his card. His intention was to pay it off over time. That’s where a credit card is different from a charge card because it lets people pay just part of their bill.

Some banks realized that the Bob Bluecollars of the world needed extra money at times, so they too got into the credit card game and started giving Bob and Mildred credit cards. As more and more people started getting credit cards, more and more places started accepting them…and more and more banks started issuing them…and so on. Until these days credit cards are accepted just about everywhere. This is how the general purpose credit card arose from the little coin on some rich lady’s keychain.

And all those banks that issued credit cards? Their association evolved into the credit card associations that we now know as Visa and MasterCard.

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