Credit cards are a convenient method for consumers to secure short-term LOANS. In today’s U.S. economy, credit cards and access to credit cards are ubiquitous; in many situations, such as hotels, it is difficult to purchase goods and services without use of a credit card. While most Americans probably cannot conceive of life without credit cards, they are a relatively recent phenomenon in U.S. business. The AMERICAN BANKERS ASSOCIATION (ABA) credits Western Union with issuing the first consumer charge card in 1914. At the time there was no FEDERAL RESERVE SYSTEM, and the banking industry consisted of thousands of small-town banks and the large money-center institutions in New York. Credit was generally a locally based decision, and consumer credit was a new concept. Many hotels and department stores quickly followed Western Union’s lead, issuing their own cards. Until the 1990s, locally based, high-interest-rate credit supported many main street businesses in small towns in the United States. In 1950 Diners Club issued the first charge card accepted by a wide variety of merchants. Diners Club began the practice of charging merchants a small percentage “discount” for facilitating purchases by consumers. The next year Franklin National Bank (New York) issued its own card accepted by area merchants. Soon nearly 100 other banks issued similar cards for their market areas, but users were expected to pay their balances when presented with a statement. In 1958 Bank of America issued its BankAmericard (later renamed Visa) for use throughout California. Bank of America was the first to offer credit rather than requiring consumers to pay their balances each month. By 1965 Bank of America had formed agreements with numerous banks, allowing them to issue BankAmericard outside of California. During the same period, a number of banks collectively created Master Charge (later renamed MasterCard). The credit-card industry grew slowly until the advent of automated teller machines (ATMs). In the 1970s, American consumers did not readily accept ATMs; most preferred person-to-person bank transactions. Using both “carrots and sticks,” incentives and disincentives, the industry gradually changed Americans’ use of credit cards. Today Visa and MasterCard dominate the credit card industry in the United States, and in recent years they have been accused of anticompetitive behavior. The two associations have pushed the use of debit rather than credit cards, where consumers’ accounts are directly debited and funds transferred to merchants as purchases are made. New technology now allows businesses to scan consumers’ personal checks and directly debit their credit accounts. Credit-card issuers are subject to a variety of legal requirements, most notably the TRUTH IN LENDING ACT (1968), which imposes a variety of disclosure requirements. They differ depending on how a credit-card application is solicited but basically require issuers to disclose the annual percentage rate (APR), annual fees, the grace period for paying without incurring a finance charge, and the method used for computing the balance on which a finance charge is based. Credit-card usage is booming in the United States. Americans owe over $1 trillion, much of it borrowed using credit cards. Economists often predict that Americans saturated with credit will have to slow CONSUMPTION spending to pay off past credit-card debt. Studies show most American consumers are insensitive to or ignorant of the INTEREST RATES charged by credit-card lenders. In recent years card issuers have aggressively pursued “subprime” borrowers, people with poor credit histories or previous personal bankruptcy. Credit-“repair” and CONSUMER CREDIT COUNSELING SERVICEs are expanding rapidly as Americans continue to increase their use of credit cards. In other countries, credit-card usage is much less prevalent, and consumer resistance to the use of credit cards has often surprised U.S. businesses expanding internationally.
See also DEBIT, CREDIT.