Credit Cards Tips for You

This Post comes from Michael, chief editor of DoughRoller.net, a personal finance website which helps consumers find the best cash back credit cards available today.

On occasion, I venture out to a small local coffee shop that reminds me of a time when “grande” was just a word I knew in Spanish.  When I went to pay for my cup of coffee, I found myself in the awkward position of holding a wallet full of plastic in a place that accepts only cash. Trudging to the nearby ATM, I thought about how we arrived at our current situation where credit cards are as prevalent as water.

To retrace the history of the credit card, we have to begin at the dawn of the 20^th century.  At the time, people paid for almost everything with cash, from a bottle of milk to a doctor’s bill.  Stores tried to build customer loyalty by offering their customers individual store credit accounts.  These allowed customers to buy things on credit and later receive a bill from the store.  However, you could only use the store’s credit card at that specific store.

The modern idea of a credit card, where you can charge purchases at many different stores, did not come about until 1950.  The event that spurred the idea was very similar to my embarrassing coffee shop incident.  A man named Frank X. McNamara, the head of the Hamilton Credit Corporation, was dining with a couple friends who would play an important role in the history of the credit card.  One was Alfred Bloomingdale, the grandson of the founder of Bloomingdale’s department stores.  The other man was Ralph Sneider, McNamara’s attorney.

At the end of the meal, McNamara pulled out his wallet to pay and found he didn’t have any cash.  McNamara couldn’t just waltz to an ATM to withdraw money.  Instead he had to phone his wife to retrieve his cash.  Determined to create a more permanent solution to this problem, McNamara came up with the idea of people using only one credit card at many different stores, restaurants, and gas stations.  Previously, stores interacted directly with their customers through store credit accounts.  Stores gave customers credit to buy goods and customers repaid the stores.  McNamara’s idea required that a middleman provide individuals with credit and individuals repaid that middleman.

McNamara and his two friends, Bloomingdale and Sneider, pooled their money together to become that middleman in the credit transaction.  They formed a company in 1950 and called it the Diners Club.  In order to make money from these charge cards, the Diners Club charged stores a 7% fee on all transactions and charged customers a $3 annual fee.  While modern credit card companies make money by charging interest on debt, that idea wouldn’t come about until much later.

Merchants weren’t initially thrilled about the Diners Club’s credit card idea.  It directly undercut their individual store credit cards.  And why should they have to pay the Diner’s Club simply for selling a product or service?  Even with these qualms, the idea of a universal credit card took off.  In only its second year, the Diner’s Club made a profit of $60,000. McNamara had started a company that would reshape the way customers make purchases.  But he didn’t seem to think it was anything special or lasting, and decided to sell his shares in the company to his two partners for $200,000.

Today, over 175 million Americans have credit cards, and each card carrier owns an average of five credit cards.  The idea of paying for everyday purchases with plastic has now become the norm, and it’s cash that is becoming obsolete.  While technology continues to advance, there’s no telling just how long credit cards will be around, but Frank McNamara will always be remembered as the father of the credit card.

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