What is a credit card?

Credit cards are everywhere these days. If anyone has an email account from any of the free email servers, chances are good that the majority of spam messages have something to do with credit and credit cards. This might bring to mind a number of complex questions about credit cards and how they work, and some of these can be answered by addressing the most simple question of what, exactly, is a credit card?

The idea of the credit card has its origins in the beginnings of commerce. The idea of purchasing something on credit might seem like a new innovation, and thanks to the advancements of technology in online banking, there are many innovations, but credit itself is very old. Getting merchandise, land, or even a drink at a pub, for no money upfront and a promise to repay is as old as civilization.

The way we think of it today, however, has more to do with the banking system than it does with a deal between two individuals. It began in the 19th century, as the modern idea of banks were just beginning to take root. The first examples of what we think of as credit cards started in the next century, in the 40s and 50s, with the Charge-It card and the Diner’s Club card. These were for purchases made at very specific locations, where the restaurant and shop owners had special arrangements with the banks to be reimbursed for customer purchases.

In this sense, then, they were very limiting, but it was also a much more secure way of thinking about purchasing, both on the part of the retailer and the consumer, because one could not purchase more than what the bank balance showed. Today, however, it’s a very different story.

Now credit cards are issues based upon the individual’s projected ability to repay. This means that one’s earnings and purchasing histories are taken into account to come up with a credit limit. It sounds simple enough, but now it’s based on money that does not yet exist, and this is where consumers can potentially get into trouble. If the bank says that there is a likelihood of money in the future, then there’s also a greater likelihood for purchasing now. It’s simple enough to see where this could lead. The banks also issue service charges, based on interest, for any debt left unpaid, and over the months, it can mean a fairly hefty price to be paid, and oftentimes one purchase can easily end up costing twice as much as the ticket price.