Credit Cards History & Overview

Credit cards are major factor in our economy, with about 75% of U. S. families using them. In fact, there were 176.8 million credit cards in use in 2008, an average of 3 per person. About 75% of U.S. families have credit cards but only 58% of those pay off the balance each month. In fact, Americans who owe credit debt usually carry a balance of around $10,000!

Credit Has Been Used for Centuries

Credit is not a new concept. Hundreds of years ago travelers would obtain a letter of credit from their banking institution before embarking on their trip. Their purchases and transactions were paid by their banks and charged to their accounts. In the 1800s consumers bought goods with credit coins and charge plates. In the early 1900s stores and oil companies issued their own cards for the convenience of patrons and to encourage purchases at their stores.
The first credit card was the concept of Brooklyn banker John Biggins. He called it “Charg-it” when he applied the idea first in 1946. Only people who were account holders at his bank could use the card for local purchases; it allowed them to make purchases and the bills were forwarded to Biggins’ bank, which paid the bill. The customer’s account was debited for the amount accumulated each month.
Diners Club, created in 1949, was thought up by businessman Frank McNamara who had been mortified when he forgot his wallet and couldn’t pay for dinner. In 3 years there were 20,000 cardholders; the entire bill had to be paid in full each month. American express issued their credit card in 1958 and within five years they had issued a million cards. Bank of America issued their own credit card in 1958, called BankAmericard, which eventually became Visa. And in 1959 Diners Club introduced the first plastic card to replace the cardboard or celluloid cards then in use.

How Does a Credit Card Work?

Having and using a credit card is a bit like having your own private lending institution. Like a bank, the credit card issuer lends you money. You make purchases using the card instead of cash or a check, the issuer pays the merchant and sends you a bill at the end of the month. You can pay the amount in full or pay less, leaving the rest of your balance unpaid. Like a loan, the unpaid amount is subject to interest; credit card issuers have some of the highest interest rates in the country. In fact, if you just pay the minimum payment you’ll find that the $200 coat you bought will end up costing you nearly twice that much by the time you pay off the purchase!
That’s not the only way credit card issuers make money, although charging interest is a lucrative part of their business. Merchants who accept the card pay a fee every time a credit card is used to buy their goods. The fees vary with different credit card issuers, which may be the reason a particular card isn’t accepted at your favorite store.
Issuers also raise revenue by charging an annual fee for the card. Some fees are as little as $30 while some issuers charge several hundred dollars a year for the privilege of using their card. Some cards have no annual fee.

Advantages of Owning a Credit Card

We’ve heard a lot lately about credit card debt and the harm that it can do to one’s finances. But there are advantages to having a credit card and using it wisely. A credit card is a good thing to have when you are traveling and don’t want to carry cash that might be stolen. If the card is stolen you can simply notify the issuer and cancel the card; you will be sent a new one and won’t be liable for charges made on the stolen card. If you are robbed of cash, however, that money is gone and it is rarely recovered.
Credit cards are also good to have for emergencies. If you don’t have enough cash saved-and few people do-paying with a credit card can save the day. A credit card can come in handy if you don’t have access to the funds you need.

There are many emergencies for which you may need a credit card:

· Your hot water heater may break down· The furnace or air conditioning system may suddenly give out· Your car might need emergency repairs· An unexpected injury of illness· An unplanned but urgent trip
You can also build up a good credit score by using a credit card, especially if you pay the balance in full every billing cycle. It is a good way for a young person to establish credit; the average age of a first time credit card hold is 20. By the time those young people are ready to make a major purchase like a new car or a home of their own, their credit score can be impressive enough to get them a low interest rate and a lower down payment.

Credit Cards have Disadvantages, too

Credit cards have been blamed for a lot of the personal debts that get people in trouble but it isn’t the credit cards that are at fault—it’s peoples’ spending habits that cause the problem. People who use credit cards to buy more than they can afford will inevitably get into trouble with debt.
Another disadvantage is the high interest rates that card issuers charge when the balance isn’t paid in full, some as high as 22%. Plus, the interest is compounded daily making it very difficult to pay off a big balance by making just the minimum payment. For instance, lets say you take a vacation and charge $600 on your card. Your interest rate is 17% and the minimum payment is $15 per month. Sounds great, right? Well, it will take you 5 years to pay off that $600 making just the minimum payments and you’ll pay a whopping $292 in interest! That doesn’t sound like such a good deal but it’s what credit card issuers hope you’ll do.
Keeping high balances on your credit card adversely affects your credit score, too. If you apply for any type of loan your credit score will reflect your credit balance and you’ll probably be charged higher interest if you get the loan at all. Lenders always look at your debt to earning ratio, the amount of money you earn compared to how much you owe. Keeping your debt low makes you a better risk for lenders.
Unfortunately, only about 58% of credit card holders pay off their entire balance each month.

Making a Credit Card Work For You

You should always choose a card with no annual fee that pays you to use it. Some cards allow you to earn 2% or more cash back on your purchases. This doesn’t sound like much but it can add up. Pay your utility bills with it, your groceries and anything else you can use it for without paying a fee. When you cash in your rewards, deposit the check in your savings account. You’ll be pleasantly surprised at how much you can earn.
Treat your credit card like a debit card to avoid overspending. Enter your purchases in your check register as you would a debit. When the bill comes, add back those charges to your balance, make out the check and pay the bill. You’ll never be shocked at your balance, you’ll always know how much money you really have and you’ll never spend more than you can afford to spend. Instead of sinking into debt, the credit card issuer will be paying you to use their card!

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