With the invention of the credit card, consumers gained access to goods and services they might not have been able to afford otherwise. The idea of a line of credit is that the consumer immediately obtains the goods or services, then pays them off over time. They borrow money from the card issuer for these purchases, essentially taking out “micro-loans” against the amount of credit provided on the card. Let’s examine America’s credit history and how we arrived at the way things operate in today’s world.
The History of the Credit Card
Diners Club issued the first universal credit card in 1950. In 1958, American Express established a card for travel and entertainment purposes. Banks seized the opportunity and began issuing cards. By the 1960s, department stores jumped on the credit bandwagon and started offering lines of credit for use in stores. Those once-limited cards eventually became backed by the Visa or Mastercard, expanding charging privileges beyond the store brand.
These days, the average credit card holder has 2.7 credit cards in their wallet. Over 191 million Americans are credit card holders, and the average American family has just over $5,000 in credit card debt. However, that is likely a conservative number, as more and more people have come to rely on credit when they don’t have the money upfront.
You might be surprised to learn that a charge card and a credit card are different. While it’s common for people to use the terms “credit card” and “charge card” interchangeably, differences exist and greatly influence what is the best fit for your situation.
The two differences between the accounts are the spending limits and repayment terms.
The most popular charge card is the American Express card. Charge cards do not have a spending limit, allowing cardholders to charge whatever they need to on a monthly basis. At the end of the billing cycle, full payment on the balance is due. While most charge cards do not impose a limit, card issuers monitor your credit worthiness and ability to pay off the balance in full each month. If they determine a downward change, they are likely to impose a spending limit after an amount exceeds their threshold. When you fail to pay the statement in full, interest or late payment fees are imposed. Annual fees are also common among charge card accounts. Rewards and perks are more lucrative on charge card charges, but again you must pay the account balance in full every month.
Alternatively, credit cards come with a spending limit determined at the time of application by the issuer. Once you’ve reached the limit, you can no longer make charges to the card. Occasionally, some brands allow you to temporarily exceed the limit, and are happy to levy an over limit fee. When it comes time for payment, a credit card will allow you to make a payment ranging from just a minimum payment amount up to the entire statement balance.
When cardholders’ payments are less than the full statement balance, interest is charged. Carrying a balance is problematic because the longer it takes to pay off the balance, the more you’re charged in interest and fees. Credit cards are backed by Visa, Mastercard, or Discover. There are many different types of credit cards and different benefits as well—some offer cash back, some offer rewards points redeemed for flights or hotels.
For an in-depth look at the different types of cards to choose from, revisit our blog Make Your Credit Card Work For You.
Credit Card Debt
The inevitable consequence of unwise purchases is the crushing weight of credit card debt. Some spend frivolously, but others can’t make ends meet. In a struggling economy where inflation rises, more Americans use credit cards to fill the short-term gaps between earnings and spending. Over the long term, this habit becomes dangerous; without the means to pay off the debt, credit card balances soar.
On the other hand, a credit card used as a convenient tool offers benefits like consolidation, buyer protection, and other rewards. It’s much more convenient to make purchases on a single card and then pay it off at the end of the month. You have all your spending outlined in a single monthly statement and can make just one payment to pay it off rather than several smaller payments to different companies. Another benefit to utilizing a credit account is having multiple authorized users, but with protections in place. This way, your family members, staff, or others have spending privileges but not direct access to cash or unlimited spending.
It has become much easier to use credit cards now compared to the good old days of the manual card imprinter and the paper charge slip. These days, swipe your card’s magnetic stripe in the reader, insert your card’s chip into the reader, or tap your card directly onto the reader itself. Some readers don’t even require a physical card. With digital wallets becoming popular, users can upload the card to their digital wallet and pay directly from their smartphone or smartwatch. Overall, how we view and use credit has changed over the years. Whether you swipe, use the chip, or tap your card, the credit world has adapted to fit the needs of our generation.
At Organized Instincts, our seasoned team of daily money managers can help you choose the credit card that’s right for you, whether you need to give access to your family members, personal assistant, housekeeper, or a caretaker. Schedule a free consultation today and keep your life running like a well-oiled machine.