An Introduction to Credit

Intro to Credit

What is Credit?

When asked this question, people are often confused as to how to define it. Quite simply, credit is allowing a consumer to receive goods before payment based on the trust that the payment will be made in the future. Credit today comes in many forms. Retailers offer their own credit for their stores including furniture stores, department stores and car dealerships. Credit cards are a familiar form of credit where if qualified, you are issued a card which can be used on almost any type of purchase (depending on the card). The market is full of offers and credit cards can be a great tool for convenience as well as your future if utilized properly. But, credit is not free money. The reason we are bombarded with so many offers is because in many cases, your best interest is not in the creditor’s mind.

The Origins of Modern Credit

The concept of credit has been recorded as early as the 1800’s when consumers used credit coins and charge plates as currency to receive goods from merchants. In the early 1900’s the modern form of credit we’re familiar with started to take shape. Department stores, such as Sears, and oil companies issues cards that were only good for use with their companies and stores. These forms of credit weren’t used as a gauge of “credit-worthiness” like today. Instead, the were used to improve customer service and keep customers loyal.

In 1946, John Biggins, a banker in Brooklyn invented the first bank card named “Charg-it.” This worked similarly to today’s credit, although it was only to be used locally and with Biggins’ bank.

The most prominent and important step in the history of credit is The Diners Club Card. In 1949 Frank McNamara was concluding a business dinner in Major’s Cabin Grill in New York. He realized he had forgotten his wallet. It was then he decided there should be an alternative to cash. He and his partner, Ralph Schneider created a small cardboard card and named it the Diners Club Card. The Diners Club Card is still around today, although not in its original cardboard form.

History of Credit
Diners Club now issues Discover and Master Cards depending on the country of issue.

Credit Cards as We Know Them

By 1960 the American Express Card had already made its debut in plastic. As it grew in popularity, more and more establishments were accepting the card every year and the number of issued cards would reach the millions quickly. The technology and methods used were far different and continued to evolve over the years to become what we know today.

Visa, Mastercard, American Express and Discover are the 4 major credit companies in practice today with countless card issuers offering their own cards. Credit cards are accepted almost anywhere purchases are made and online. Since our checking accounts are linked to debit cards, the need to carry cash in your pocket is dwindling rapidly.

The credit card continues to evolve. We now have chips in our cards to use instead of the traditional magnetic strip. You can even load your credit cards into your smartphone or smartwatch and “tap to pay” with a wallet app like Apple Pay or Samsung Pay. These apps utilize a Near Field Communication chip (NFC) embedded in the latest smartphones’ motherboard. With these advances in technology, credit cards are more versatile than ever. If only I could have my drivers license on my phone I wouldn’t need a wallet at all!

Credit Card Payment with NFC
Some smartwatches have NFC chips to use at POS terminals.

Conclusion

Credit has certainly taken many forms over the years. As many times as it may change and evolve, the idea remains generally the same. Credit issuers allow us consumers to obtain goods or services in advance of payment. Understanding credit and its origins will be useful for those starting out with it. Keep coming back to Dean Myerow Finance for more lessons and tips on credit and money management.

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Dean Myerow
Dean Myerow retired as a municipal bond market asset manager for Las Olas Wealth Management in June 2018. He has earned degrees from the University of Massachusetts School of Business and the University of Miami School of Law.

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