Credit cards change with the economy

The credit card is a financial instrument with a past.

Its recent history involves a boost in the average card interest rate to 17.34 percent over several months, erasing a year of reductions.


Its complete history chronicles dramatic "egalitarian" change in which heavy personal debt became possible for most Americans, not simply the richest ones.

Western Union issued the first consumer charge card in 1914 for preferred customers, throwing in services such as free deferred payment.


Then in the 1920s, Texaco issued cards for local dealers that enabled customers to charge gas purchases. Those were heavy cardboard, not plastic. During the 1930s, Wanamakers was the first retailer to provide revolving credit, moving from 30-day credit to credit for up to four months.

In 1950, the Diners Club Card was introduced and became the first single charge card accepted by a variety of merchants. A year later, Franklin National Bank in New York issued the first bank-based charge card, a move followed by more than 100 others.

"In the 1980s, banks moved into the higher-risk credit market by giving cards to those who were younger, less-educated and in lower income brackets," noted Robert Johnson, senior research associate at the Credit Research Center at Purdue University, West Lafayette, Ind. "The average amount of bank card debt being carried rose, and fewer consumers paid off in full."

Debt outstanding from all cards was $82 billion in 1980, compared to $287 billion last year. The variable-rate card eclipsed the fixed-rate card.

"The vast majority of credit cards through the mid-1980s were fixed rates, which were immune to fluctuations in the prime lending rates or cost of funds," explained Robert McKinley, president of RAM Research in Frederick, which tracks the credit card industry.

"We didn't see variable rates until the mid-1980s, but today about two-thirds of cards are variable."

(The monthly RAM CardTrak newsletter costs $5 for a single issue or $60 a year from CardTrak, P.O. Box 1700, Frederick 21702.)

The full brunt of 1994 rate increases, generally tied to the prime lending rate, will be felt Oct. 1 because many issuers boost rates quarterly, rather than monthly.


Credit cards have always held the highest loan rates, but they are particularly high right now when compared with other rates. In 1980, the average credit card rate was 17.3 percent, the discount rate charged on loans by the Federal Reserve was 11.5 percent and the prime lending rate was 15 percent. This year, with card rates averaging 17.34 percent, the discount rate is 3.50 percent and the prime rate is 7.75 percent.

Cards moved from a handy payment vehicle to a loan instrument used everywhere. "Original use of plastic involved charging on travel and entertainment cards in which you deferred payment until the end of the month or billing cycle," said Ruth Susswein, executive director of the nonprofit Bankcard Holders of America (BHA). "In these days of heavy credit card marketing, you can even use your card at the movies, supermarket or doctor's office."

(BHA's low-interest and no-fee credit card list is available for $4 .. from BHA, 6862 Elm St., Suite 300, McLean, Va. 22101.)

A vast array of cards is offered, some from companies giving rebates on services or products, and others issued by organizations to which the consumer has a relationship. The future will emphasize technology.

"The so-called 'smart card' has a memory chip that keeps track of transactions or stores your personal information, but it may be several years before we see a changeover to such advanced cards from the current magnetic strip," said James Daly, editor of the Chicago-based Credit Card News, a bimonthly trade publication for the credit industry.

Some of the lowest nationally offered card rates, according to RAM, were recently:


* Signet Bank Consumers Best, Richmond, Va., (800) 952-3388; annual fee of $29; variable rate of 5.90 percent.

* Oak Brook Bank, Oak Brook, Ill., (800) 536-3000; annual fee of $17; variable rate of 7.75 percent.

* Wachovia Bank, Wilmington, Del., (800) 842-3262; annual fee of $18; variable rate of 7.75 percent.