A Humble Start for Today’s Necessity

In the 1950s, dapper men with mustaches and fedoras used them to settle their bills at Delmonico’s, “21” or the Copacabana. They were a novelty for the affluent and the urbane, much like jet travel, at a time of postwar economic boom and optimism.

Today we rely on them to pay for the mundane supplies of everyday life, from groceries to gasoline.

The credit card, an idea begat 50 years ago when an absent-minded businessman dining out had left his wallet elsewhere, now provides financial convenience for about 157 million Americans--close to the adult population of about 200 million.

But it also has been blamed for seducing millions of profligate spenders into crushing debt and even bankruptcy. And fraudulent charges, by crooks and cyberpirates, cost companies big time.

Still, the credit card endures as an emblem of convenience and an instrument of the democratization of credit.

It means “even the little guy can borrow,” said Frederic Mishkin, a professor at Columbia University Business School in New York. In addition, he said, “There’s a tremendous convenience that allows us not to carry cash around.”

For Chantal de Jonge Oudraat of Washington, D.C., the cards’ convenience means that when she flies on her frequent trips to Europe, she often takes less than $20 cash.

“There are two things I check before I go on a trip: my passport and plastic,” she said.

De Jonge Oudraat, 43, carries five or six cards--close to the U.S. average. And she uses her ATM card in machines overseas to get local currency.

Credit cards were paper, originally, like library cards. They didn’t become plastic until 1959, a move by American Express to make them less vulnerable to fraud and easier to process.

The first charge card is said to have appeared in February 1950. Businessman Frank McNamara had dined at Major’s Cabin Grill in Manhattan and, reaching for his wallet, realized he’d left it in another suit. Fortunately, his wife paid the tab, but McNamara wondered if a different solution could be found.

At a later meal at Major’s, McNamara tried paying with a small cardboard card bearing his signature, which he dubbed a diner’s club card, and signing for it. It worked; his being known at the restaurant probably helped. McNamara and his attorney founded Diners Club, now owned by banking giant Citigroup.

The first card was offered to 200 people, mostly McNamara’s friends and acquaintances. Fourteen Manhattan restaurants initially agreed to accept it. By March 1951, the company claimed 42,000 Americans were carrying the card and more than 330 U.S. businesses were accepting it. Membership cost $3 a year.

At first, they were all charge cards, meaning that balances had to be paid in full each month. Bank credit cards as we know them, used to buy now and pay later, were introduced in 1951 by Franklin National Bank in New York, which eventually became European American Bank.

Fast forward to 2000. There are “affinity” credit cards that earn frequent-flier miles or donations to favorite charities, ATM cards, check cards, debit cards, smart cards, department store cards, gas cards and gift cards. There are credit cards with tiny ID photos or “smart chips” for security.

There are no-frills credit cards and, at the other end of the spectrum, a new premium card from American Express with a $1,000 annual fee that gives holders free airline and hotel upgrades, a personal travel counselor and their own concierge.

In a fiercely competitive business, banks try to sell their cards by offering seductively low “teaser” interest rates for several months. Still, the annual interest on credit cards in this country averages around 18%. Credit cards have become an extremely profitable business for banks, which own the card networks.

We use credit cards to pay for everything--groceries, video rentals, stuff on the Internet, postage stamps, even taxes. Police use credit card receipts to help solve crimes. And credit cards are used all over the world: They were introduced in China in 1980.

About 157 million Americans have at least one credit card or charge card, up from 122 million in 1990; 46 million have a valid passport; about 185 million have a driver’s license.

“Don’t leave home without it.”

“It’s everywhere you want to be.”

In TV ads, credit cards pay for priceless moments cooking stew with Grandma, visiting the Irish farm where Mom grew up, sharing tears with a close friend on her wedding day.

About 1.5 billion cards bulge in Americans’ wallets, and another 3 billion a year are hawked through the mail.

“Children, dogs, cats and moose are getting credit cards,” Federal Reserve Chairman Alan Greenspan recently told the Senate Banking Committee.

Although the heated competition has driven down interest rates, consumer groups and other critics say it also has driven credit card companies to abusively target marketing campaigns toward young people, especially college students.

About 70% of students at four-year colleges have at least one credit card, and revolving debt on those cards averages more than $2,000, said Georgetown University sociologist Robert Manning, who has studied credit card debt among college students. In the worst cases, he says, students are forced to drop out and work full time to pay off their debts. Some recent suicides by college students have been attributed to their despondency over mounting credit card debts.

There are other concerns:

* Federal regulators worry about increases in risky loans by banks--including credit cards--to people with poor credit histories. The higher-interest loans, called subprime loans, played a role in some of the eight U.S. bank failures last year.

BestBank of Boulder, Colo., for example, sold high-interest credit cards as part of a travel-club membership to consumers nationwide with inferior credit records. Its failure drained about $232 million from the federal deposit insurance fund.

* In mid-January, someone pilfered thousands of credit card numbers from CD Universe, an Internet music seller. Described as the largest mass cancellation of credit cards ever, it soon was followed by another blow to security when the credit card database of health products supplier Global Health Trax was opened to hackers for a few hours.

And online travel agency Expedia recently said it would set aside $4 million to $6 million to compensate for fraudulent credit card purchases on its Web site.

* Set to go to trial in June is a Justice Department lawsuit against Visa and MasterCard, filed in October 1998, challenging the joint control of the two networks by the same group of big banks. The government also challenged rules imposed by Visa and MasterCard barring banks that issue their cards from doing business with smaller, competing card networks, such as American Express and Discover.

* The nation’s biggest retailers, led by Wal-Mart Stores Inc., are seeking $8.1 billion in damages from Visa and MasterCard in federal court for alleged unfair domination of the debit-card business, which the retailers say has pushed up stores’ transaction fees and costs for consumers.

In both cases, Visa and MasterCard, which together account for 75% of all credit card purchases in this country, are contesting the allegations. They maintain that consumers have unlimited choices in credit cards, with thousands of Visa and MasterCard member banks competing not only against rival brands but also among themselves by offering different rates, credit limits and other features. The companies say they shouldn’t be forced to offer their competitors’ products.

The stakes are high. Unpaid balances for the 80 million households with credit card accounts now average $6,000 to $7,000, according to the Consumer Federation of America.

Fifty years ago, people saved money until they had enough to buy something, the idea behind the fast-fading Christmas clubs, for example. Now, in our instant-gratification culture, people buy first and pay later--sometimes much later--with the help of plastic.

And sometimes, later turns into never. Personal bankruptcies in this country reached a record 1.4 million in 1998, despite the strong economy, up more than 300% since 1980. In some bankruptcies, credit card debts are erased; in others, they are repaid partially or over long periods of time.

Job loss, catastrophic illness and divorce are cited as frequent causes. But credit card companies say too many people simply have become irresponsible about their debts and have abused the bankruptcy court process as the social stigma of bankruptcy has waned.

In the last few years, the banking industry has spent millions pushing legislation in Congress to make it tougher to sweep away debts through bankruptcy.

The bills, versions of which cleared the House last year and the Senate last month, apply new standards for determining whether people filing for bankruptcy should be forced to repay their debts under a court-approved reorganization plan rather than having them forgiven.

The Clinton administration, which supports rewriting the bankruptcy laws in principle, has criticized both the Senate and House versions as being too hard on debtors, but both bills passed with veto-proof margins.

Consumer groups and other opponents maintain the legislation favors corporate profits over the needs of families struggling with debt. They insist that the credit card companies share the blame by flooding consumers with solicitations to entice them into easy credit.

Still, about 43% of consumers pay off their credit card balances every month, the banking industry says. That practice doesn’t thrill banks either; they earn no interest. They do, however, earn transaction fees from merchants every time the cards are used.

From Frank McNamara’s first office on the 24th floor of the Empire State Building, credit cards fanned out across the country, traversed oceans and eventually arrived in the farthest reaches of the Third World and the Internet. Next destination: outer space?

Alfred Bloomingdale, who succeeded McNamara as Diners Club president, mused in a 1959 magazine interview: “Where will it end? I don’t see any limits. I think someday you’re going to be able to charge anything.”

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On the Net: The Consumer Federation of America has a publication on its Web site called “Managing Your Debts: How to Regain Financial Health,” which emphasizes credit card debt: https://www.consumerfed.org-/mngdebts.pdf.