Financial Literacy - Credit savvy
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The evolution of credit cards

"Merchants were confronted with the notion of either pay this and have an opportunity to expand your business or don't -- pretty much the same as today when merchants are confronted with American Express," he says, which charges a higher merchant discount than its competitors. "They can say, sure they charge a high merchant discount, but we'll pay it because our margins are high enough and it encourages the kind of business we want. Or we won't pay it."

Banking deregulation begins

Before credit cards could really catch on, banks had to figure out a way to get around interest rate constraints imposed by interstate banking laws.

These laws prohibited banks in one state from lending money to people in another. States set their own interest rate ceilings, so an out-of-state bank couldn't lend at their own higher rates to another state's citizens.

In 1978, a Supreme Court ruling in the case of Marquette National Bank of Minneapolis v. First of Omaha Service Corp. changed that. The result: Nationally chartered banks could charge people in other states the interest rate set in the bank's home state. Like miners to California during the gold rush, big banks flocked to states that had no cap on interest rates.

"It (the Marquette ruling) allowed banks to become national issuers of cards with more or less uniform interest rates, and allowed banks to set up shop in Delaware or South Dakota, where there are no limitations on interest rates," says Evans.

This step toward deregulation, combined with liberalized interest rates, resulted in the expansion of credit, he adds.

Profitability in the 1980s

Despite the growth and development of the industry through the 1970s, the profitability of credit cards lagged. That would change in the 1980s.

"That is the modern phase of the distinction between the charge and the credit card. The timeline of that is really beginning at the '82-'83 recession, because that was pretty much the end of the usury laws and with the dramatic reduction in inflation, credit cards became profitable again," says Robert Manning, Ph.D., author of "Credit Card Nation."

Interest rates had declined -- though lending rates did not -- and a period of stagflation came to an end, prompting consumers to feel more like spending.

"There was a big period of great profitability from 1983 to 1990, says Evans.

"Up until 1983, the banks were charging interest rates of 18 percent or so, but on the other hand their cost of capital was really big. So the spread they had between the money they lent and their own cost of capital was pretty small," he says.

In some ways the early 2000s could be compared to the 1980s, with lots of borrowing and plenty of freewheeling spending.

"Everyone was feeling optimistic and engaging in a lot of borrowing. But over time these guys have good years and they have bad years -- like now," says Evans.

Rewards a big hit

In 1989, Citibank struck a deal with American Airlines to give consumers reward points, ushering in a new era for the industry.

"That was a big deal," says Evans. The concept snowballed from there.


"It led to more people getting cards because they got rewards, but it also led to people wanting to use the cards more, because in addition to getting financing, they would get rewards," Evans says.

It was also an era for fees.

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