Credit Card And It's Effect.

History of the Credit Card

The route of credit card begins around 1914. It was introduced from company such as Western Union and other department stores, hotels, and oil companies. At that time, the card can only purchases goods and services from the issuer and the full amount must also be repaid upon the due date. The first "general-purpose" charge card was not introduced until 1950. It was the Diner's Club who initiated; however, it was not until the late 50s when the banks entered the credit card industry and revolutionized it by allowing balances to be carried over from month to month.

For more than a decade, the credit card industry was growing at a very slow rate, largely due to the fact that only local bank cards were accepted by the merchants. The national system to process credit card transactions developed at 1966 when Bank of America began to license its BankAmericard credit card logo to the other banks. The system however becomes a chaos at the late 60s as the franchisees' attempts to undercut competitors by the means of cheating. In 1970, Dee Hock convinced Bank of America to separate its banking division from the BankAmericard system to resolve the issue and transformed it to what is now known as the Visa payment network. Other group of banks followed and formed the MasterCard association.

Regulations of the Credit Card Industry

Although the development of Visa and MasterCard associations was recognized by the merchants nationwide, different usury laws across the states set back the potential benefits of the system. Some states set the usury ceilings considerately low in compare to other states making it less appeal for issuers to lend loans in this states. In addition, the interpretation of the federal law at the time regulated the lender to charge no more than the usury ceiling where the borrower resides. This increases the legal burden cost the issuers have to bear also.

Combined with the complexity and the highly regulated usury law across the states, the issuers' profit margins were much bounded. Limited profitability causes the lenders to be especially cautious to extend the credit to the higher risk borrowers. In a regime of restrictive usury ceilings, where the lenders' income potential was limited, lenders extend credit only to higher quality borrowers, and poorer quality borrower were shut out of the market. This situation resulted in less credit availability and lower charge-offs. The credit availability continued to be rigorous throughout the 70s as high nominal interest rate were introduced by the Federal Reserve to counter off the high inflations. This made the issue of scarce credit availability even more visible.

Deregulations of the Usury Law

The interpretation of the usury law was changed by the Supreme Court in 1978 with the case of Marquette National Bank of Minneapolis v. First Omaha Service Corp.

It is based on the Minnesota solicitor general who tried to prevent First Omaha from exporting Nebraska's higher interest rates into Minnesota. The general believes that the permission of exporting higher interest rates will distort the effectiveness of the state usury law. However, the court adopted the section 85 of the National Bank Act and stated that the usury issue should be a legislative matter. Hence allowed the lender to charge the highest interest rate based on where they reside instead of the borrowers.

This decision resulted changes of usury ceilings across states and redistribution of lending to certain states. Although some states refused to attract banks and consumer lenders to immigrate by the means of deregulating interest rate. However, two states, South Dakota and Delaware took the opportunities to boost their employment rates and attract more capitals. Citi Bank, who was struggling to stay alive with the usury ceiling of 12% at New York seized the benefits of this movement and immigrated to South Dakota. With the new usury law at South Dakota, Citi Bank was able to charge as high as 20% on consumer loans across the nation. Many other banks followed the movements and by June 1997, 43% of the credit card and consumer loans institutions are located at Delaware, the largest credit card volume of any state.

The decision of Marquette further led to a drastic increase of credit card lending. According to the Federal Reserve Survey of Consumer Finances, the percentage of households with at least one credit card account grew from 38 percent in 1977 to 43 percent in 1983 to 54 percent in 1989 (GAO, 1994, 13). Credit card loans also become the most profitable bank division, earning approximately 30 billion dollar profits.

Issue of the Bank Marketing

The deregulation of usury law has also trigger the credit card war across the banks. The high profitability induces banks to enlarge their credit card divisions and compete for the volumes of the customers. Almost all the banks that possess a credit card division have come up some means of benefits to help promoting their cards. For example, American Express promoted their card through air mile points based on the amount of the dollars cardholders spent each transaction. They also has card like the Hilton Card which target the frequent business travelers. Other banks allure their customer through cash back, points reward etc.

Telephone, mailing and media soliciting were also used as the key marketing tools to sell credit cards. According to the published reports, credit card solicitations industry-wide have hit record levels with 881 million solicitations mailed in the second quarter of 1997. Stephen Brobeck, executive director of the Consumer Federation of America, estimate 2.8 billion pieces of mail were sent by the industry in 1997. Besides the regular mailbox bombs, stacks of broachers reside next to the cash registering in the stores and of course the constant plays of the popular TV commercial of "For everything else there is Visa." Hundreds of millions of telephone solicitations and advertisement are spent each year by the industry. For consumers, it has become impossible to avoid daily attacks from credit card advertisement anymore.

Many economists and social scientists now raise the business ethics questions about banks aggressive marketing scheme. According to the statistic, majority of the soliciting mails