Credit card

• 1. Introduction

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  A credit card lets its holder buy goods, pay for services, or withdraw cash on credit, then repay the debt later. That simple deferral has made it one of the most widely used forms of payment across the world. In 2020 there were 1.09 billion credit cards in circulation in the United States alone, and 72.5% of American adults, some 187.3 million people, carried at least one. Worldwide, the count reached 7.753 billion cards. But the card in your wallet is not quite what it seems. It is not a debit card, which spends money you already have. It is not a charge card, which demands the full balance every month. The credit card lets a balance roll forward, gathering interest at a set rate, with a third party paying the merchant and waiting to be repaid. How did a rectangle of plastic, 85.60 by 53.98 millimeters, come to sit at the center of trillions of dollars in commerce? Who pays for it, who profits from it, and why does it cost cash users money too?

• 2. From Metal Coins To Plastic

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  In the late 19th century, charge cards arrived as coins. Made of celluloid, copper, aluminum, steel, and other whitish metals, some were shaped like coins with a small hole so they could ride on a key ring. Hotels and department stores handed these charge coins to customers with charge accounts. Each carried a charge account number alongside the merchant's name and logo, ready to be imprinted onto a sales slip. The Charga-Plate, developed by Farrington Manufacturing Company in 1928, pushed the idea further. A rectangle of sheet metal embossed with the customer's details, it held a small paper card on the back for a signature. To record a purchase, a clerk laid the plate into a recess in an imprinter, placed a paper charge slip and inked ribbon on top, then pressed them together. Large merchants issued Charga-Plates to regular customers, sometimes keeping the plates in the store's own files rather than handing them over. They sped up bookkeeping and cut manual copying errors, and they stayed in use in the U.S. from the 1930s to the late 1950s. In 1934, American Airlines and the Air Transport Association introduced the Air Travel Card. Its numbering scheme identified both the issuer and the customer account, letting passengers buy now and pay later for a ticket and earn a fifteen percent discount at accepting airlines. By the 1940s every major U.S. airline offered the card, usable on 17 different airlines, and by 1941 about half of the airlines' revenues flowed through the agreement. In 1948 it became the first internationally valid charge card across all members of the International Air Transport Association.

• 3. The Bank Takes Over

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  Until 1958, no one had successfully built a revolving credit system where a card from a third-party bank was accepted by a large number of merchants. Every earlier charge card had been issued by a single merchant and honored only by a few. Ralph Schneider and Frank McNamara, founders of Diners Club, cracked part of the puzzle in 1950. Their card, born partly through a merger with Dine and Sign, let customers pay many different merchants with one card, though the whole bill came due each statement. Carte Blanche followed, and in 1958 American Express built a worldwide charge card network. That same year, Bank of America launched the BankAmericard in Fresno, California. It chose Fresno because 45% of residents banked there, then mailed a card to 60,000 residents at once, giving merchants a reason to accept it. The card solved a chicken-and-egg trap. Shoppers would not carry a card few merchants took, and merchants would not take a card few shoppers used. In 1976 the BankAmericard licensees united under the brand Visa. A rival appeared in 1966, when a group of banks formed Master Charge, the ancestor of MasterCard. It gained ground when Citibank folded its own Everything Card, launched in 1967, into Master Charge in 1969. The United Kingdom's Barclaycard launched in 1966 as the first credit card outside the United States.

• 4. Drops And Reckonings

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  Early U.S. credit cards were mass-produced and mailed out unsolicited to bank customers judged to be low risk. The judgment failed often. According to LIFE, cards were mailed off to unemployable people, drunks, narcotics addicts and to compulsive debtors. Betty Furness, President Johnson's Special Assistant, compared the practice to giving sugar to diabetics. Bankers called these mass mailings drops, and the financial chaos they caused led to a ban in 1970. By the time the law took effect, roughly 100 million cards had already been dropped into the U.S. population, after which only applications could be mailed unsolicited. In 1973, under Dee Hock, the first CEO of Visa, the system was computerized, cutting transaction time. Yet verification stayed loose for decades. Until always-connected terminals spread at the start of the 21st century, many merchants waved through charges below a threshold or from trusted customers without a phone check. Books listing stolen card numbers circulated to merchants, who were meant to check each card and match the signature on the slip to the one on the card. The procedures were cumbersome, so merchants often skipped them and ate the risk on smaller sales. Regional monopolies defined the early industry until antitrust cases intervened. The 1978 Supreme Court decision Marquette National Bank of Minneapolis v. First of Omaha Service Corp. held that nationally chartered banks could be regulated only by the federal government and their chartering state. Lenders rushed to the friendliest states, and higher-interest cards spread widely, often issued from South Dakota and Delaware.

• 5. The Interchange Machine

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  Every swipe sets off a relay of payments that runs through the card associations, a flow the industry calls the interchange. The cardholder presents the card and the merchant submits the transaction to the acquiring bank, which checks the number, type, and amount with the issuing bank and reserves part of the cardholder's credit limit, generating an approval code. Authorized transactions are gathered into batches, usually sent once per day at close of business. The acquirer then routes the batch through the card association, which debits the issuer and credits the acquirer. Once paid, the acquirer pays the merchant the batch total minus a tiered processing fee. Several distinct parties make this work. The card-issuing bank bills the consumer and bears the fraud risk. The acquiring bank collects on the merchant's behalf. Card associations such as Visa, MasterCard, American Express, and Discover set the terms, while independent sales organizations resell acquiring services and affinity partners like sports teams, universities, and charities lend their names for a fee. Disputes reverse the flow. In a chargeback, money in a merchant account is held over a dispute, the issuer returns the transaction to the acquirer, and the merchant must accept or contest it. The size of the card is no accident either, standardized at 85.60 by 53.98 millimeters under the ISO/IEC 7810 ID-1 standard, the same dimensions as ATM and debit cards.

• 6. Who Pays The Price

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  Merchants pay interchange and discount fees on every credit card transaction, commonly around 0.5 to 4 percent of each sale. Because card contracts often barred passing the cost directly to card users, merchants raised prices for everyone instead, cash payers included. In the United States in 2008, credit card companies collected $48 billion in interchange fees, an average of $427 per family, at roughly 2% per transaction. Rewards programs deepen the imbalance, producing a total transfer of $1,282 from the average cash payer to the average card payer per year. The fight over those fees has filled courtrooms since 2005. The National Retail Federation and major retailers including Wal-Mart accused MasterCard and Visa of using monopoly power to levy excessive fees. In December 2013 a federal judge approved a $5.7 billion settlement, the largest antitrust settlement in U.S. history, though Wal-Mart and Amazon chose to keep fighting. In April 2015 the EU capped the interchange fee at 0.3% on consumer credit cards and 0.2% on debit cards. Cardholders carry their own hazards. Low introductory rates last only a fixed term, usually 6 to 12 months, before a higher rate kicks in, and some cards levy 20 to 30 percent after a missed payment. Under universal default, a high rate can hit a card in good standing because of a missed payment on an unrelated account from the same provider. First Premier Bank once offered a card with a 79.9% interest rate, discontinued in February 2011 after persistent defaults. Research finds that about 40 percent of consumers choose a sub-optimal card agreement, some paying hundreds of dollars in avoidable interest. Studies also show people spend more on credit cards because they do not feel the abstract pain of payment.

• 7. Cards For The Credit-Poor

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  A secured credit card asks the cardholder to put money down first. The deposit usually runs between 100% and 200% of the credit desired, so a $1,000 deposit might yield credit of $500 to 1,000, though incentives can drop the requirement as low as 10%. Issuers favor this model because delinquencies fall sharply when a customer perceives something to lose. The deposit sits in a special savings account and is not seized for one or two missed payments. It becomes an offset only when the account closes, often after severe delinquency of 150 to 180 days. An account less than 150 days delinquent keeps accruing interest and fees, so the total debt can climb far above the credit limit, leaving the cardholder with a forfeited deposit and extra debt on top. For someone with negative or no credit history, the appeal is that most issuers report regularly to the major credit bureaus, letting the holder build or rebuild a record. Fees and service charges on secured cards often exceed those on ordinary cards. Prepaid cards take a different path. Despite the prepaid credit card label, they are debit cards, since the holder spends money deposited in advance rather than borrowing. They carry a brand like Visa or MasterCard and work much like a credit card, yet charge no interest, only purchasing and monthly fees. As of 2018-71.7% of U.S. debit cards were prepaid. The Financial Consumer Agency of Canada calls them an expensive way to spend your own money.

• 8. The Arithmetic Of Interest

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  If a user runs a $1,000 transaction and repays it in full within the grace period, no interest is charged. Leave even $1.00 unpaid and interest applies to the full $1,000 from the date of purchase until payment arrives. Grace periods range from 20 to 55 days depending on the card and bank, and with most cards there is no grace period at all if any balance carried over from the previous cycle. The standard formula multiplies the annual percentage rate by the average daily balance, divides by 365, and multiplies by the number of days the amount revolved. Interest charged from the original transaction up to a partial payment is called a residual retail finance charge, which is why a charge can appear even after the next statement is paid in full. Credit limits flow from the applicant's credit score, income, and existing debt. Federal Reserve data from 2022 showed prime borrowers with FICO scores of 680 to 739 holding median limits of $7,100, against $1,500 for subprime borrowers below 620. The aggregate credit line across U.S. consumer cards passed $5 trillion in 2022, with prime and super-prime borrowers holding about 80% of available credit. Minimum payments carry their own trap. Interest on unpaid balances accounts for roughly 8% of all interest ever paid, and when a minimum falls below the cycle's finance charges, the balance grows in what is called negative amortization, banned in the U.S. since 2003. In 2009 the C.A.R.D. Act became law, requiring 45 days notice before certain fee increases and enacting protections for issues that Senator Carl Levin had raised over hidden fees and compounding interest.