How Diners Club Sparked the Consumer Credit Revolution

Credit cards. You apply for one because it offers you cash back, frequent flyer miles, or some other perk. (After all, the email said you were “pre-approved.”) Or your bank basically handed it to you when you applied for a checking account. Most people today have several in their wallets, and cards (either credit or debit) are the assumed model of payment for most daily transactions.

Credit itself, in various forms, goes back a long way. Everyday consumers of the 19th century may have been familiar with shopkeepers allowing them to pay on a weekly or monthly basis.

In the 20th century, department stores’ customer accounts became the direct precursor of credit cards. Valued customers were allowed to run up a tab and pay on a monthly basis. In order to record transactions, stores used charge “plates” of metal, which resembled military dog tags. As credit cards later would be, these plates were embossed with a customer’s details, allowing them to be stamped through carbon paper.

The limitation, of course, was that these accounts were store-specific. Having credit with Bloomingdale’s in New York wouldn’t help much if a shopper went to London and wanted to charge a fur coat at Harrods. Increased travel drove the need for this new, portable credit form.

The first real credit card to meet this need was Diners Club. According to their own website:

Diners Club began its proud history in 1950, all because a man named Frank McNamara had dinner in a New York restaurant but left his cash in another suit. Unable to pay the bill without his wife coming to bail him out, he resolved never to be embarrassed again and founded Diners Club.

McNamara had spotted a gap in the market. He found restaurants willing to participate in his enterprise, and he would later hold out his new Diners Club card to a waiter, and charge his meal, in what became the first credit card transaction.

That dining would be the first industry for this credit option made sense in a way; a next iteration of the old club model where members would sign for their meals and pay a quarterly or annual bill, hence naming the card the Diners’ Club (they later dropped the possessive apostrophe). “Dining” also restricted it to a certain class of consumer, the businessman who might want to treat clients to a steak dinner—this way nobody was doing anything so crass as handing over cash in front of their guests.

But the idea took off fast, allowing people to travel to a city where they were not known and wave a token proving their ability to pay for that duck à l’orange. Not just to a bank (via a letter of credit, or a traveler’s check—both familiar options to Diners Club’s first members), but to a restaurant or a retailer.

In the 75 years since that first card transaction (the earliest cards were cardboard; the plastic versions with embossed numbers—and then magnetic strips—would come later), the concept took off. Bank of America’s BankAmericard arrived in 1958, the same year as American Express.

The explosion of consumer credit had predictable results, in both shopping habits and debt creation. Whereas earlier generations used layaway to pay for items in installments, we now get the goods first and pay after. We want what we want now, and credit enables our impulses (the average American has over $6,000 in credit card debt).

Meanwhile, credit itself is no longer an option; it’s an obligation. In 1989, Fair, Isaac and Company created the FICO score, a number that would become more important as the years passed. Today, your creditworthiness affects much more than whether you can get a Visa card or a mortgage.

Your credit score can influence how much you pay for insurance. If you’re applying for a job with financial responsibility or security clearance, your credit will be checked. Some people even check the credit history of dating prospects!

And the credit card industry has become so massive that Delta Airlines makes at least as much from their credit card business as actually flying planes. Poor Diners Club got rather pushed aside in the shuffle; they are not the major card in most people’s pocketbooks today.

But they did get there first.

This piece originally was posted by the Foundation for Economic Education.