credit card reaches a milestone, The

Northwestern Financial Review, Apr 8, 2000 by Bengston, Tom

This year marks the 50th anniversary of the credit card, that little piece of plastic that most of us carry in our wallets to make life more convenient. Legend has it that in February 1950, a man named Frank McNamara was entertaining clients at a Manhattan restaurant called Major Cabin Grill. Upon presentation of the bill, he was embarrassed to notice that he had left his wallet in another suit. He ended up having to call his wife at home. He waited while she drove out with his wallet. As McNamara exited the restaurant, he wondered if there wasn't a better way to pay for a meal at a restaurant.

McNamara later worked out an arrangement with Major's under which he could present a small, signature bearing cardboard card at the end of his meal and be sent an invoice for the bill. McNamara liked the arrangement because it made him feel like the patron of a private club where signing for meals was an established practice. The restaurant went along with the arrangement because McNamara was a long-time customer, and they knew his credit was good. McNamara called his card a "diners club card,' and it eventually grew into the international credit card company that is now owned by Citigroup.

McNamara promoted his concept to a few friends and relatives. Before long, the restaurant was extending credit to about 200 people. Plus, 13 other Manhat tan restaurants joined in the arrangement. By the end of 1950, an estimated 42,000 Americans carried the Diners Club Card and more than 330 businesses honored it. These were charge cards, which meant that cardholders had to pay off balances immediately. The card-issuing company made money by charging cardholders $3 per year.

New York's Franklin National Bank, which is now European American Bank, introduced a credit card in 1951. This card allowed cardholders to make partial payments each month, thus introducing the concept of revolving credit.

Today of course, credit cards come in all varieties. Affinity cards bear the name of clubs, colleges and organizations. Cards that earn frequent flyer miles are particularly popular. So are cards that reward cardholders with cash back plans, or donations to favorite charities. Many cards feature holograms, microchips or photo IDs for security While 75 percent of all transcations are made with Vise or Matercard, amny other comapnies offer credit cards, including department stores and gas stations. While few cards have no annual fees others attract users with substantial fees and perks.

Experts tell us that 157 million Americans, more than three-quarters of the adult population, have at least one credit card. The average cardholder has six cards. The Consumer Federation of America estimates that 80 million households have average outstanding credit card debt between $6,000 and $7000. It also estimates that 43 percent of all cardholders pay off their credit card balances every month.

Statistics also show that about 70 percent of students at four-year colleges have at least one credit card. A Georgetown University sociologist recently noted that the average outstanding balance on a credit card owned by a college student is $2,000.

The credit card industry certainly will continue to evolve. Next month, the courts are scheduled to begin hearing arguments in a case involving Visa and MasterCard. The case is being brought by the Lla Justice Department, which doesn't believe there is enough competition between the two. Also, Visa and MasterCard are facing a second suit by Wal-Mart and other major retailers. They argue that the big two card companies are unfairly dominating the debit card industry.

There is no question, however that credit cards have made life a little easier for responsible people. Big item purchases, such as suits or appliances, are much more manageable with plastic. Now, it is common to use a card to purchase groceries. Small items are even fair game. At many airports, travelers can requisition a $1.50 baggage cart with a credit card. The IRS even lets filers pay their taxes with a credit card. And think of all the small business success stories that begin with an entrepreneur maxing out a handful of credit cards to get start up money.

Of course, not everyone is responsible with easily obtained credit. Congress is concerned about the high number of bankruptcies being filed by individuals who get in credit card debt over their head. Financial education is the key to reducing the number of problems caused by irresponsible credit use. The Personal Economics Program and other consumer education efforts go a long way to teach people responsible use of credit. These kinds of efforts should be encouraged at both the individual bank level and at the industry level.

By Tout Bengtson