The History of Credit and Credit Cards

The ancient credit and debt system
Merchants have been extending credit to buyers since ancient times. Credit was commonly used in Assyria, Babylon, and Egypt thousands of years ago. Since the days when people traded in grains and cattle, merchants have been able to increase sales by allowing consumers to buy now and pay later. Even before the written word, about 9000 years ago, people kept track of debts with tokens. Written language was encouraged along, as methods were developed in order to keep track of sales, debts, and interest.

Over 3000 years ago, the Mesopotamian People developed a system of tracking debts on a clay tablet. These tablets contain the earliest known financial records in the history of mankind. The Sumerians were the first known people to develop the concept of receiving interest for credit. Earlier merchants would only expect to receive back what was loaned out. The Sumerians learned and understood the time value of money; a herd of cattle this year would be worth more next year due to new births. Their word for interest was also their word for calves.

Debts, with interest, were now being recorded. Farmers had to pay their debts by the agreed upon date or risk losing their farms to foreclosure. There was also a possibility of having to sell themselves or their family members into slavery to pay for the debt if it could not be met otherwise.

During the rein of Hammurabi from 1792 - 1750 B.C., regulations of interest, credit, and debt forgiveness were developed. These regulations allowed for debt forgiveness if a farmer’s inability to pay was due to weather-induced crop failure. It also limited the amount of time that they could be kept in slavery to work off a debt. 1200 years after Hammurabi’s time, the idea of commonly accepted money came along. As cattle and bags of grain were cumbersome to haul around, people began to look for new ways to pay. Silver coins were minted by the Athenians in 546 B.C., and were the first to be widely accepted among merchants.

Credit in Early America
In the early days of America, craftsmen and merchants had no choice but to extended credit to increase sales. It was a necessary part of staying in business. Consumers expected to pay later for things they wanted to enjoy right away. Merchants kept logs of individual accounts and collected the payments on a regular schedule. Terms and interest rates were dependant on the economic conditions in each locale.

Manufacturers of household items often sold items such as sewing machines, furniture, jewelry, clothing, and other products on installment contracts. Department stores began offering credit to their favorite customers, using an in-store log system. As cities grew more populated, it became difficult for stores to keep up with the logs of every consumer. In the 1920’s, stores began to issue a metal tag called a shopper’s plate, which could only be used in the store that issued it.

Development of modern day credit cards
Gas cards were issued in 1924 to encourage brand loyalty, and consumers accepted them with open arms. Many families now owned automobiles, and it was easy to pay for fuel when they traveled with a gas card. They had no need to carry large amounts of cash or worry if gas merchants would accept an out of state check.

The first credit card to be accepted at many locations was the Diner’s Club card. Frank McNamara came up with the idea in 1949 when he realized, due to a personal experience, that people should be able to pay for purchases without having to carry cash with them at all times. A network of merchants in the restaurant, hotel, and air travels industries accepted the Diner’s Club Card. The Diner’s Club card was the first internationally accepted card, soon in use in Canada, Mexico, and Cuba.

American Express actually started out as a delivery business in 1850. They began issuing money orders in 1882 and traveler’s checks in 1891. They issued the first charge cards in 1958, and within five years more than a million were in use across the world. In 1958, Bank of America issued the first revolving credit card that allowed a consumer to pay what he could, with a finance charge being applied to the remaining balance. The Americard, which we now know as Visa, would become one of the most widely accepted credit cards in the world. The Interbank Card Association came into the scene in 1966. This was a network of banks, and soon included banks from outside the U.S. The Interbank Card Association is now known as MasterCard.

The widespread use of credit was a big money maker for the credit card industry, such a moneymaker that card issuers were in a hurry to give out as many as possible. They began mass mailing pre-approved credit cards to every household, whether they were requested or not. Thieves picked through people’s mail to find the free money that was available by stealing someone else’s credit card. Consumers didn’t even know there was a card sent to them until they received the bill that a thief had run up. This became such a widespread problem that Congress began to regulate the credit card industry in the 1970’s to protect consumers from receiving credit cards that they did not apply for.

Though the modern day credit card has only been developed over the last century, credit itself has been in use since the first man wanted to trade based on the next year’s crop or herd production. This way of trading has allowed for commerce and the development of business. Credit has allowed consumers to live a nicer lifestyle than their cash on hand allows. Credit has allowed people to get through tough times without putting their family out of a home. Credit has allowed us to purchase now what our future earnings will pay for. If we could only pay for something if we had the cash in our pocket, our world would be much different than it is today.



Sources:
History of Credit and Debt; Steve Rhode, Myvesta Foundation 2000-2007
History of the American Credit Card
CNN.com