Throughout their history, credit cards have offered advantages over all forms of money: They’re pocket size, easily portable, secure and have no intrinsic value in themselves. Read on to learn how credit cards came to be, how they’ve evolved and what they may look like in the future.
To fully appreciate the modern convenience of credit cards, simply insert your chip card, pause while it processes and consider what it replaced.
Prior to plastic, money as a means of exchange for goods and services was cumbersome, if not outright dangerous. Beginning as far back as 9000 B.C. with cattle and camels, currency took some truly odd shapes, from cowrie shells, bronze and copper imitation cowrie shells and gold and silver nuggets to Chinese deerskin notes and Native American stringed wampum beads.
From the beginning, credit cards offered significant advantages over all forms of money: They’re pocket size, easily portable, relatively secure and have no intrinsic value in themselves. What’s more, true credit cards buy you time to pay your bill, typically with a modest fee attached.
See related: How do credit cards work?
The dawn of credit cardsAccording to historian Jonathan Kenoyer, the concept of using a valueless instrument to represent banking transactions dates back 5,000 years, when the ancient Mesopotamians used clay tablets to conduct trade with the Harappan civilization. While still cumbersome, a slab of clay with seals from both civilizations certainly beat the tons of copper each would have had to melt down to produce the coins of that era.
Fast-forward to America circa the 1800s. During westward expansion, merchants would use credit coins and charge plates to extend credit to local farmers and ranchers, allowing them to forgo paying their bills until they harvested their crops or sold their cattle.
In the early 1900s, a few U.S. department stores and oil companies took credit one step further by issuing their own proprietary cards, the precursor to modern-day store cards. Such cards were accepted only at the issuing merchant and designed less for convenience than to promote customer loyalty and improve service.
Bank-issued charge cards originated in 1946 when a Brooklyn banker named John Biggins launched the Charg-It card. Charg-It purchases were forwarded to Biggins’ bank, the middleman that reimbursed the merchant and obtained payment from the customer in what came to be known as the “closed-loop” system. Purchases could only be made locally and only bank customers could obtain a Charg-It card. Five years later, New York’s Franklin National Bank followed suit, issuing its first charge card to its loan customers.
With postwar America on the go, two dining and entertainment charge cards quickly followed.
The Diners Club Card, which debuted in 1950, was inspired a year earlier by an “a-ha” moment when a customer named Frank McNamara forgot his wallet while attending a business dinner at New York’s Major’s Cabin Grill. Months later, McNamara and his partner, Ralph Schneider, returned to the restaurant with a small cardboard card and a proposal that resulted in the Diners Club Card.
Used mainly for travel and entertainment, the Diners Club Card claims the title of the first credit card in widespread use. Although its purchases were made on credit, Diners Club was technically a charge card, meaning the bill had to be paid in full at the end of each month. By 1951, Diners Club had 20,000 cardholders.
The American Express card, which launched in 1958, had an altogether different provenance. Formed in 1850 as a competitor to the U.S. Postal Service, American Express had introduced money orders in 1882, invented traveler’s checks in 1891 and contemplated a travel charge card as early as 1946, before Diners Club beat it to the punch.
American Express would soon claim milestones of its own by expanding its reach to other countries and introducing the first plastic card in 1959, replacing cardboard and celluloid. Within five years, 1 million American Express cards were in use at 85,000 merchants, foreign and domestic.
See related: Credit card market share statistics
The invention of bank cards and revolving credit
Major banks would soon launch their own consumer cards, but with a welcome twist. Instead of users having to settle their bill in full each month, bank cards would truly become credit cards by offering revolving credit, which allowed cardholders to carry their monthly balance forward for a nominal finance charge.
Bank of America was first out of the gate in 1958, mailing unsolicited BankAmericard credit cards to select California markets. In 1966, BankAmericard went national to become the nation’s first licensed general-purpose credit card. It would be renamed Visa a decade later to acknowledge its growing international presence.
Also in 1966, a group of California banks formed the Interbank Card Association (ITC), which would soon issue the nation’s second major bank card, MasterCard. Present-day Mastercard competes directly with a similar Visa organization, both of which are run by boards comprised primarily of current and former high-level executives from major corporations.
Unlike their nonbank competitors, the bank card associations operate in an “open-loop” system that requires interbank cooperation, as well as transfers of funds. While banks initially had to choose between the Visa and Mastercard association, changes to association bylaws have since allowed banks to join both associations and issue both types of cards to their customers.
See related: How does a credit card transaction work?
Regulation and litigation
As the popularity of bank and nonbank credit cards exploded in the 1970s, so did legislation aimed at addressing consumer complaints against this fast-growing industry. Among the regulatory course corrections:
- The Fair Credit Reporting Act of 1970 restricted the collection and use of credit report data.
- The Unsolicited Credit Card Act of 1970 prohibited issuers from sending active cards to customers who hadn’t requested them.
- The Fair Credit Billing Act of 1974 amended the Truth in Lending Act to rein in abusive billing practices and enable consumers to dispute billing errors.
- Also in 1974, the Equal Credit Opportunity Act was passed, disallowing lenders to discriminate against any applicant based on gender, race, marital status, national origin or religion.
- The Fair Debt Collection Practices Act of 1977 amended the Consumer Credit Protection Act to prohibit predatory debt collection practices and rework the debtor’s bill of rights.
The debut of the Sears Corporation’s Discover Card at the 1986 Super Bowl resulted in major litigation when Discover filed an antitrust suit against Mastercard and Visa for unlawfully preventing their association banks from issuing Discover cards. The six-year litigation ended in 2004 when the U.S. Supreme Court declined to hear the defendants’ appeal, effectively allowing banks and other card issuers to issue multiple card brands.
Passage of the Credit Card Accountability, Responsibility and Disclosure Act of 2009, aka the CARD Act, provided greater transparency for consumers and eliminated or reduced a range of card issuer transgressions involving interest rate hikes, late fees and over-limit fees in the depths of the Great Recession.
Technological innovation and transformation
Since 1960, when IBM introduced magnetic stripe (or “mag-stripe”) verification to credit cards, technological innovations have occasionally stolen center stage in the cashless payment play.
The card form factor itself broke out of its mold in 2002, when there was a card personalization trend to allow users to slap their favorite photo onto the face of their card. Mastercard and Visa both launched interactive cards with tiny powered LCD screens that generated a one-time passcode at the push of the card’s other novelty, either a button or a mini-keyboard.
Aromatic cards issued by Germany’s Commerzbank and Japanese card giant JCB were once the rage overseas. And even jewelers caught card design fever, turning credit cards into wearable art. Yet none of these innovations really caught on, and today, nearly all of us still use cards with the same 3.370-inch by 2.125-inch form factor, without our picture on it.
But some technological changes have emerged as standards. While the vast majority of credit cards still have a 1960s era magnetic stripe, cards that include a microchip, visible on the front of the card, are now standard.
The first of these so-called smart cards was created in the 1980s and became popular in Europe throughout the early- to mid-1990s. If you look closely, you’ll even notice a smart chip-enabled credit card in the 1995 romantic comedy “French Kiss.” It appears in the scene where the character played by Kevin Kline attempts to check into a French hotel using a stolen credit card.
The current smart chip specifications, called EMV, were published in 1996. EMV computer chip cards were pioneered by Europay, Mastercard and Visa. These chip-enabled cards have the advantage of using encrypted communication rather than relying on an unencrypted magnetic stripe that’s easy to read and copy onto a fraudulent card, otherwise known as cloning.
In October 2015, the retail payments industry underwent what was called the liability shift. Since then, the costs of fraudulent transactions are borne by the retailer if it chooses not to upgrade its terminals to accept the new cards.
The lone exception to this mass technological migration was fuel pumps, as gasoline retailers successfully pushed to have their liability shift delayed until April 2021 due to the high cost of retrofitting existing pumps with built-in terminals. Even then, it was estimated that less than half of fuel merchants were able to comply with the EMV standard by that time.
Beyond EMV card technology, there exists radio-frequency identification (or RFID), which enables touchless ID verification between cards and other devices embedded with an RFID chip/antenna set and a merchant’s RFID card reader. This technology allows you to complete a transaction by tapping your card against a compatible terminal and features similar encryption to EMV smart chips.
And since most smartphones can produce the same radio signals as RFID-enabled credit cards, phone-enabled payments became the next natural step. Services like Apple Pay, released in 2014, and Google Pay, released in 2015 as Android Pay, allow cardholders to load their information on their smartphone and leave their cards at home.
Soon after came the creation of wearable devices that can transmit compatible radio signals. These devices with embedded chips can include bracelets, wristbands and watches. There are even clothes manufactured with chips embedded in the sleeve, enabling seemingly magical payments with the wave of an arm.
The future of credit cards
What will credit cards look like in 25, 50 or 100 years? The companies that manufacture plastic and metal credit cards know that we won’t always need a physical artifact to represent our financial accounts. In fact, many of them now offer virtual credit cards upon request if you want an extra level of security while you shop.
After all, we don’t carry around cards that represent all of our loans and investments. The near future likely lies with greater adoption of payments enabled by smartphones and other contactless devices, even as no standard has emerged from all the competing technologies available.
These devices work well until you come across a merchant’s terminal that isn’t RFID compatible. In 2021, there are still plenty of retailers that don’t use RFID-compatible terminals and several popular credit cards that aren’t compatible with the most popular mobile payment systems.
There are also tens of millions of consumers who would still rather just pull out their favorite card than try to guess if a retailer’s particular terminal will be compatible with their payment system. As it has with so many other technologies, when a dominant standard emerges, it will look obvious to all in retrospect.
Beyond radio frequency enabled cards, phones and wearables, the next step will be payments made using biometric authorization, such as fingerprints, iris scans and facial recognition. However, challenges still remain. While you can easily get a new account number if your credit card’s information is stolen, it’s not that easy with biometrics. You can’t change your fingerprints or the pattern of the blood vessels in your eyes if someone steals that data.
See related: How to protect yourself from credit card fraud
Cards change, but accounts are timeless
Judging by the changes we see around us today – from rapidly evolving online and mobile payment technologies to home appliances that monitor and digitally reorder their own contents – card payments will be increasingly integrated into our lives in new and creative ways. Just as we make purchases with internet-enabled devices from companies like Amazon and Google, perhaps we’ll make purchases through our cars, our refrigerators and toasters.
But what continues to remain largely the same is your credit card account, regardless of which physical device, if any, is attached to it. Credit card accounts continue to provide the most secure and convenient method of payment possible. These accounts also offer us unmatched benefits, with many featuring the chance to earn rewards for spending.
And of course, credit card users continue to have the option of financing their purchases over time or avoiding interest charges by paying their balances in full. The laws pertaining to these accounts have undergone legal reform approximately once in every generation, such as the Fair Credit Billing Act of 1974 and the CARD Act of 2009. So it’s likely that we’ll see further refinements of these laws in the future.
Ultimately, it’s the financial terms of credit card accounts that are the essential and timeless features of our “cards,” regardless of whether we continue to use some kind of device to access our accounts in the future.