Credit cards for a specific industry or store have been in operation in the US since 1914, offered as marketing tools by lenders to encourage loyalty to their particular products or outlets. The first universal credit card – Diners Club, which came onto the US market in 1949 – was primarily a travel and entertainment card used by on-the-road salespeople to purchase goods and services from a broad range of providers (later supplanted by American Express). The card ushered in credit as a profitable service in its own right, through which consumers were offered purchasing power and retailers were offered customers so long as each paid a fee for the service. But the concept had a conundrum: consumers would not sign up unless a card was widely accepted by merchants, and merchants would not sign up until they saw a demand for a card. Consequently, banks undertook a mass mail-out of unsolicited credit cards in the late 1960s, which successfully placed credit cards in the wallets of millions.^1^ This tactic – offering unsolicited credit to consumers – is still practised successfully today around the world, peaking in the US in 1998 with an incredible 3.5 billion direct mail solicitations.^2^
The fans of credit cards say that it has greatly enhanced the quality of life for all classes, but particularly the economically disadvantaged. Unlike the travel and entertainment cards that are used by the affluent, for banks to achieve a large cardholder base they have had to accept customers with a lower economic profile and a higher default rate. Its critics say that by deferring payment on consumption they mask the growing income gap between rich and poor. Thus, while initially the vast majority of consumers tended to pay their bills on time so that interest could not be charged,^1^ this is no longer the case. Paying by credit, not through savings, is now cemented into consumer culture.
Some governments are encouraging this trend. For instance, the South Korean Government – hit hard by the Asian Financial Crisis – gave tax breaks for consumers who paid for purchases by credit cards in order to stimulate their economy. It worked: between 1999 and 2002 credit card use increased sixfold to 114 per cent of Gross Domestic Product, while consumption and output both grew by over six per cent. But in 2003 eight per cent of the population was defaulting on credit card payments. In a salutary reminder about bursting bubbles, by the beginning of 2004 the largest South Korean credit card issuer – LG card – had to be rescued from insolvency with a $3.9 billion Government bail-out.^3^
- L Mandell, _The Credit Card Industry – A History_, Twayne Publishers, Boston, 1990;
- RD Manning, _Credit Card Nation_, Basic Books, New York, 2000;
- D Valderrama ‘After the Asian Financial Crisis: Can Rapid Credit Expansion Sustain Growth?’ _Federal Reserve Bank of San Francisco Economic Letter_, no 38, 24 December 2004.
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