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: On the 50th anniversary of the introduction of credit cards, we evaluate whether one of modern finance’s greatest innovation is a boon or a bane
Amidst the headline news surrounding the global credit crisis, we have ignored celebrating a very important milestone - one whose introduction changed forever the face of consumer credit. This month marks the 50th anniversary of credit cards. It is worth recalling how far we have come and what lessons the past holds for us, especially in the context of the current global credit crisis, as India joins the rank of a credit card oriented economy.
Do you “believe” in credit?
The word credit is derived from the Latin word ‘credere’, which means to believe. The whole notion of credit is based on the trust that the borrower will pay back the lender. Borrowing is a centuries-old phenomenon. But until recently, access to credit for the common person was very challenging. It involved hours of paperwork, reviews by loan approval committees, and personal interviews of the borrower - all done to ensure that the borrower was dealing in good faith and had the capacity to repay the loan. The process was cumbersome, time consuming, and very undemocratic in that not all persons were able to get a hassle free loan.
Yes, cards really did “drop” from the sky….
One fine day in September 1958, the availability of credit was democratised. Bank of America “dropped” (marketing speak for mass mailing) 60,000 unsolicited cards to all residents in the town of Fresno, California. The cards arrived in the mailboxes of consumers who had not applied for a card, and in fact, were not even familiar with how to use them. But residents learned very quickly and within one year had racked up bills of more than $60 million (about $375 million in today’s money or Rs 1,690 crores). Within 13 months of the original mailings, Bank of America “dropped” another two million cards in every part of California. Thus started the American middle class’ addiction to credit.
….but both Bank and consumers had a painful landing
The Bank’s aggressive mailings had some disastrous consequences. People did not quite understand that the money they were spending today on their cards ultimately had to be paid back to the credit card company at the end of the month or quarter. Right from the beginning, consumers stretched themselves. Delinquent accounts, i.e., accounts that could not pay up their...
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