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Credit Cards

Richard A. Feinberg and Cindy Evans

The small molded piece of polyvinyl chloride known as the credit card has transformed the American and the world economy and promises to be at the heart of the future economic system of the world. Social scientists have long recognized that the things people buy profoundly affect the way they live. Microwave ovens, refrigerators, air conditioners, televisions, computers, the birth control pill, antibiotics--all have affected peoples' lives in profound ways. The credit card has changed peoples' lives as well, for it allows unprecedented access to a world of goods. The emergence of credit cards as a dominant mode of economic transaction has changed the way people live, the way they do things, the way they think, their sense of well being, and their values. When credit cards entered American life, ordinary people could only dream of an affluent life style. Credit cards changed all that.

Credit cards were born in the embarrassment of Francis X. McNamara in 1950. Entertaining clients in a New York City restaurant, Mr. McNamara reached for his wallet only to find he had not brought money. Though his wife drove into town with the money, McNamara went home vowing never to experience such disgrace again. To guarantee it, he created the Diners Club Card, a simple plastic card that would serve in place of cash at any establishment that agreed to accept it. It was a revolutionary concept.

Of course, credit had long been extended to American consumers. Neighborhood merchants offered credit to neighborhood customers long before McNamara's embarrassing moment. In the 1930s oil companies promoted "courtesy cards" to induce travelers to buy gas at their stations across the country; department stores extended revolving credit to their prime customers. McNamara's innovation was to create a multipurpose (shopping, travel, and entertainment) and multi-location card that was issued by a third party independent of the merchant. He took to the road and signed up merchants across the country to save others from his fate.

McNamara's success led to a host of imitators. Alfred Bloomingdale of Bloomingdale's department store fame introduced Dine and Sign in California. Duncan Hines created the Signet Club. Gourmet and Esquire magazines began credit card programs for their readers. But all of McNamara's early imitators failed. Bankers, however, saw an opportunity. Savvy as they are about giving out money for profit, bankers were more successful in offering their own versions of national cards. Success came to Bank of America and Master Charge, who came to dominate the credit card business in the 1960s. In the late 1970s Bank Americard became VISA and Master Charge became MasterCard. In 1958, American Express introduced its card. Their success the first year was so great--more than 500,000 people signed up--that American Express turned to computer giant IBM for help. Advanced technology was the only way for companies to manage the vast numbers of merchants and consumers who linked themselves via their credit cards, and in the process created a mountain of debt. Technology made managing the credit card business profitable.

To make their system work, credit card companies needed to get as many merchants to accept their cards and as many consumers to use them as they possibly could. They were aided by the sustained economic growth of the post-World War II era, which saw the United States realize the potential for becoming a true consumption-based society. Credit card companies competed with each other to get their cards in the hands of consumers. With direct mail solicitations, televisions advertisements, and the ubiquitious placement of credit applications, these companies reached out to every segment of the consumer market. Affluent Americans were flooded with credit card offers at low interest rates, but poorer Americans were also offered credit, albeit with high interest rates, low credit lines, and annual fees. As the cards filled the wallets and purses of more and more consumers, the credit card became the essential tool of the consumer society. At the same time the competition for the consumer heated up at the retail end. First to differentiate themselves from and then to keep up with competitors, more and more retailers, businesses, and services began accepting the cards.

By the 1990s, just 50 years after the birth of the modern credit card, there were more than 450 million credit cards in the United States--about 1.7 cards for each woman, man, and child. Moreover, more than 3 billion offers of credit cards are made annually. VISA administered about 50 percent of the credit cards in circulation. MasterCard had 35 percent, the Discover Card 10 percent, and American Express 5 percent.

The amount of money channeled through credit cards is staggering. By the late 1990s, about 820 billion dollars were charged annually--approximately $11,000 per family--and credit cards accounted for $444 billion of debt. About 17 percent of disposable income was spent making installment payments on credit card balances; the average cardholder owed approximately $150 per month. Eight billion transactions per year involve credit cards. Simply put, credit cards have a profound effect on the economy. To put the force of credit cards into some perspective, in 1998 the Federal Reserve put 20 billion dollars of new money into the economy, while U.S. banks unleashed the equivalent of 20-30 billion dollars of new money into the same economy via new credit cards and increased spending limits.

Given the strong tie between credit card spending and the economy, the fact that consumers have freely used credit cards to fuel their lifestyles has been good for the country, for the stock market, and for retirement plans. But spending is more than simply an economic issue. Spending reflects deeper and broader social and psychological processes. These processes may underlie the true meaning of credit cards in American culture.

Spending money to reflect or announce one's success is certainly not a new phenomenon. Anthropologists have long reflected upon tribal uses of possessions as symbols of prestige. In the past the winners were the elites of the social groups from which they came. But credit cards have leveled the playing field, affording the "common folk" entry into the game of conspicuous consumption. Indeed, the use of credit cards allows people with limited incomes to convince others that they are in the group of winners. Credit cards have thus broken the link that once existed between the possession of goods and success.

Money does buy wonderful things, and many derive satisfaction from knowing that they can buy many things. Credit cards allow consumption to happen more easily, more frequently, and more quickly. The satisfactions achieved through consumption are not illusory. Goods can be authentic sources of meaning for consumers. Indeed, goods are democratic. The Mercedes the rich person drives is the same Mercedes that the middle class person drives. Acquiring possessions brings enjoyment, symbolizes achievement, and creates identity. Because credit cards make all this possible, they have become a symbolic representation of that achievement. Having a Gold card is prestigious and means you have achieved more in life than those with a regular card. (A Platinum card is, of course, even better.) Credit cards are more than modes of transaction--they are designer labels of life, and thus impart to their user a sense of status and power. People know what these symbols mean and desire them.

The ways that people pay for their goods differ in important social, economic, and psychological ways. Unlike cash, credit cards promote feelings of membership and belongingness. Having and using a credit card is a rite of passage, creating the illusion that the credit card holder has made it as an adult and a success. Unique designs, newsletters, rewards for use, and special deals for holders make owners of cards feel that they are part of a unique group. Prestige cards such as the American Express Gold Card attempt to impress others with how much the user seems to be worth. Finally, credit cards are promoted as being essential for self-actualization. You have made it, card promoters announce, you deserve it, and you shouldn't leave home without it; luckily, it's everywhere you want to be, according to VISA's advertising slogan. Self-actualized individuals with credit cards have the ability to express their individuality as fully as possible.

There are, however, costly, dangerous, and frightening problems associated with credit card use and abuse. First, credit cards act to elevate the price of goods. Merchants who accept credit cards must pay anywhere from 0.3 to 3 percent of the value of the transaction to the credit card company or bank. Such costs are not absorbed by merchants but are passed on to all other consumers (who may not own or use credit cards) in the price of products and services. Second, credit cards create trails of information in credit reports that reveal much about the lives of users, from the doctors they visit to their choice of underwear. Not only do such reports reveal to anyone reading them information that the credit card user might not want made available, but confusion between users can result in embarassing and costly mistakes. Third, credit card fraud creates billions of dollars in costs which are paid for in high fees and interest rates and, eventually, in the price of goods. VISA estimated that these costs amount to between 43 and 100 dollars per thousand dollars charged. In 1997 credit card companies charged off 22 billion dollars in unpaid bills, 60 million a day. Finally, consumers pay in direct and indirect ways for the personal bankruptcies that credit card abuse contributes too. In 1997 the 1.6 million families who sought counseling with debt counselors claimed 35 billion in debt they could not pay, much of it credit card debt. The result of these problems is the same: consumers pay more for goods.

One of the untold stories in the history of credit cards is the manner in which the poorer credit card holders subsidize the richer. Payments on credit card balances (with interest rates that normally range from 8 to 21 percent) subsidize those who use the credit card as a convenience and pay no interest by paying their charges within the grace period. The 50 to 60 percent of consumers who pay their balances within the grace period have free use of this money, but they could not do so unless others were paying the credit card companies for their use of the money. The people who pay the highest interest rates are, of course, the people with the lowest incomes.

In an obvious way, the convenience of using credit cards increases the probability that consumers will spend more than they might have otherwise. But using credit cards is also a bit like the arms race: the more the neighbors spend, the more consumers spend to stay even. Such competitive spending, while a source of sport for the wealthy, can be potentially devastating to those on more limited incomes.

Interestingly, credit card spending may facilitate spending in a more insidious manner. Research has shown that the facilitation effect of credit cards is both a conscious/rational and unconscious process. At the rational end credit cards allow easy access to money that may only exist in the future. People spend with credit cards as a convenience and as a means to purchase something that they do not have the money for now but will in the near future. However, as an unconscious determinant of spending, credit cards can irrationally and unconsciously urge consumers to spend more, to spend more frequently, and make spending more likely.

Credit card spending has become an essential contributor--some would argue a causal determinant--of a good economy. Spending encourages the manufacture of more goods and the commitment of capital, and creates tax revenues. By facilitating spending, credit cards are thus good for the economy. Credit cards are tools of economic expansion, even if they do bring associated costs.

In 50 years, credit cards have gone from being a mere convenience to being crucial facilitators of economic transacations. Some would have them do even more. Credit card backers promote a vision of a cashless economy in which a single credit card consolidates all of a person's financial and personal information needs. And every day consumers vote for the evolution to a cashless electronic economic and information system by using their credit cards. Americans are willing prisoners of and purveyors of credit cards, spending with credit cards because of what they get them, what they symbolize, and what they allow them to achieve, experience, and feel. In many ways credit cards are the fulfillment of the ultimate dream of this country's founders--they offer life, liberty, and the pursuit of happiness.

St. James Encyclopedia of Popular Culture, 2002 Gale Group.