A History of the Credit Card

By Larry Loheit, Chapter 13 Trustee Retired, Charter Member of NACTT

Congress is cognizant of the fact that individuals experiencing personal financial problems have been seeking bankruptcy relief more readily than what has been experience historically.  What are the major contributing factors that have fueled this phenomena?  One factor was the lending institutions loosening of credit.   Historically, credit was given to those who had demonstrated a good credit reputation and were able to make a substantial down payment when requesting credit for major purchases.  Banks were not risk takers.  They weren’t in the business of exposing their investors and depositors to possible loss.

Banks, afterall, were sophisticated and their customers were handled with more dignity and respect because their borrowers were more ‘qualified’, less risky folks who had earned the credit privilege of lower interest rates.  Although these loans were at lower rates than loan/finance companies they were administratively costly because a great deal of administrative time/man-hours were required to ‘qualify’ those borrowers, borrowers who could meet the ridged standards of a banks’ lending policy.  As a result, there were fewer loans, fewer automobiles financed, fewer automobiles sold and fewer automobiles manufactured.

It wasn’t until New Car Dealerships created the ‘Dealer Guarantee’ that banks began to feel more comfortable in ‘financing’ new automobile contracts with borrowers whom they would have previously denied credit.  These ‘Contracts of Sale’ were written by the ‘Automobile Dealers’ rather than with the bank.  The ‘Dealer Created Contract’ was the Dealer actually acting as the bank when writing those contracts.  They financed them… unless or until the automobile dealer could sell the contract to a financial institution.  Dealers didn’t want to hold the ‘contract’.  They were in the business of selling automobiles.  The more they sold the more profitable they became.  Dealers needed to find lenders to buy the contracts signed by consumers who couldn’t meet the banks ridged credit requirements.  Banks were enticed into buying these (more risky) contracts when the interest rate paid a higher return than the banks normal rate and when the dealer guaranteed the loan by promising to buy back the contract at any time the bank chose to do so.  The Dealers had no objection to buying back the contracts as long as the bank didn’t let the borrowers become more than 90 days delinquent.  The “Automobile’ 90 Day Dealer Guaranteed Contract” was born and became the driving force behind the expansion of credit for ‘automobile contracts’.  Higher rates of interest in the dealer written contracts created increased earnings by banks, more sales by automobile dealers, more sales by the dealers salesmen, more automobiles being manufactured, more people working at GM, Ford, Chrysler, etc. all earning more money and all being extended more credit.  This was as self-fueling win-win-win-win-win-win situation.

Other lenders (usually finance companies as very few credit unions existed at the time) would lend small amounts of money (usually the equivalent of one or two months of the borrowers monthly salary) at high interest rates to borrowers who had a fairly good credit record.  Larger amounts required the pledging of collateral such as ‘household furnishings or a used vehicle’ (often with co-signers) which provided the lender with something more than a mere signature promising to pay.  Banks at the time looked down on the loan company’s practices of high interest rate, high risk loan practices.

Major stores such as Sears, Macy’s, Montgomery Wards, J.C. Penny & Co.  and others sold appliances and ‘large ticket items’ on their own ‘in-house’ contracts.  They usually carried their own ‘paper’ and charged a relatively hefty interest rate when compared to bank contract rates.  These high interest rates were needed to pay the cost and cover the losses associated with the cost of retailers carrying their own paper.  This practice allowed large merchandisers to move more product.  The more purchases they financed, the more merchandise they sold… and sales were their lifeline.  Other high-end merchandise outlets who couldn’t afford to carry their own ‘paper’, tried to sell their contracts to banks or finance companies so they could ‘cash-out’ these contracts and use the money to buy more product and make more sales.

Many of these same merchandise stores began to produce their own credit cards for the sale of ‘soft-goods’ at higher rates of interest to help entice customers to buy their ‘low-ticket’ merchandise now and pay over-time which also allowed the retailer to move more product.

Banks began to realize they were missing out on a major slice of the market by limiting their credit to only the elite and not allowing the largest part of the marketplace to owe them high interest rate debt.  They also realized the manpower necessary to qualify borrowers for low interest loans may not be the best way to make money.  Bank of America introduced the BankAmericard as a means to earn three or four times the rate of interest on debt than what they had been earning on their ‘sophisticated’ loans.  Not only that, they could eliminate the majority of their ‘loan officer’ employee overhead and focus on expanding the acceptance of their new BankAmericard program to retail outlets everywhere.  Retail outlets using their credit card were charged a 2% surcharge while the consumer was usually charged 18% interest or more.  The bankcard was making money from both the retailer and the consumers, overhead was reduced with fewer employees and increase automation and computerization.

More product could be moved by small retailers who couldn’t afford a credit department to handle and carry their own contracts or have their own creditcard.  Small retailers who didn’t have hi-end products to write ‘contracts of sale’ to sell their ‘paper’ to banks or lenders was no longer an issue since their customers now had the convenience of a BankAmericard.  As consumers acceptance and use of BankAmericard grew, so too did the adoption of this practice expand to other banks.  Mastercharge joined in the expanding use of unsecured credit initially to other banks.  Later American Express joined the parade of bankcard use too.  As the use of these cards grew, so too did the profits grow enticing other financial institutions to join in on the high interest unsecured credit business.  New companies wanting to gain a slice of the business began to weaken the ‘pre-qualifying’ process by providing low-ceiling credit cards to the more risky consumers until ‘risky customers’ could prove themselves worthy of handling higher amounts.  It became a very lucrative means for banks to charge high enough interest and other charges associated with credit card use to show generous profits even after cost and losses.

It didn’t take long for the widespread acceptance and use of Visa, BankAmericard, Mastercharge and American Express to expand to where the general public possessed multiple high limit credit cards which expanded to include cash advances with the convenience of ATM machines.  This phenomena singlehandedly made the use of ‘finance companies’ almost obsolete.  Companies such as:  Beneficial Finance, Laurentide Finance, Public Finance, Pacific Finance, Local Loan Company, Household Finance, Seaboard Finance, Morris Plan, Fireside Thrift and others were no longer needed by their prior customers since they had credit available to them without the need to go through a loan process that often required they pledge security or co-signers.  The widespread use of ‘easy credit’ grew to the point where many cardholders were using one card to pay for another when faced with difficulty in paying minimum payments.  The use of easy credit snowballed to the point where many consumers who faced the slightest disruption of pay or an unexpected expense found themselves in a financial quandary impossible to escape.


loheitLarry Loheit began his career in 1963 when he went to work for his father Robert (Bob) E. Loheit who had been appointed the prior year as the Chapter 13 Trustee in the Sacramento Division of the Northern District of California just prior to the formation of the Eastern District of California. Both of them attended the founding meeting of NACTT in Kansas City. Larry briefly served as a Chapter 7 trustee before being appointed as the Chapter 13 trustee upon his fathers’ retirement in 1977. Since retiring last year Larry has created a website www.retired713trustee to help consumers understand bankruptcy, Chapter 7 and Chapter 13 and to help consumers understand the need to retain and how to find, select and qualify the best Chapter 13 attorneys in their area.

No Author Biography has been linked to this Article.

Related Articles

Copy of Hildebrand-2016
February 20, 2022
Bankruptcy Court found violation of automatic stay to be “technical”, thus no damages. Ninth Circuit BAP did not agree. Continuing to pursue state court fraudulent transfer action after transfer or filed for Chapter 7 relief violated the automatic stay; even if the violation of the stay is “technical”, damages, including attorneys’ fees and costs, should be assessed against the violator....
Copy of Hildebrand-2016
February 5, 2023
Mortgagee’s failure to disclose payment changes resulting from escrow adjustments and interest rate modifications compels the Court to order mortgagee to credit all undisclosed increases and subject it to sanctions, including attorney’s fees. (Somers) In re Kinderknecht, 2023 WL 320984 (Bankr. D. Kan. January 19, 2023) Case Summary Kyle and Chasity Kinderknecht filed a Chapter 13 petition in December of...
January 31, 2021
By Rachel Jones, Staff Attorney to Chapter 13 Standing Trustee Chris Micale, Western District of Virginia (Roanoke) The events of 2020 have had a devastating impact on the very low-income population. The working poor are struggling, particularly those working in sectors such as hospitality and tourism. State and Federal funding and local programs such as food banks and community action...
August 9, 2020
By The Honorable William Houston Brown (Retired) Disputed claim included in calculation of eligibility. The debtor’s case was dismissed for exceeding § 109(e)’s unsecured debt limit, when the debtor had signed $1,092,000 mortgage note but the mortgage was never recorded. The lender filed an unsecured claim for $1.7 million, and the Bankruptcy Appellate Panel agreed with the bankruptcy court that...
Academy Circle Logo Final
September 17, 2023
Recently Upsolve printed an article titled: “Why is Chapter 13 Probably A Bad Idea” by Jonathan Petts, July 27, 2023. In a nutshell the article says an unsuccessful Chapter 13 can leave you in worse financial shape. Further it states that it costs more than Chapter 7 and is less likely to be successful. Additional points by Upsolve are: Chapter...
March 27, 2022
(Used with permission,Volume 1, Issue 3:3 6 March, 2022 cdcbaa) Jon: Hi Aki. I can’t believe after knowing you for 30 years now that I don’t know where you were born. Aki: Ha! I was born in Tokyo, Japan although we moved to California when I was about one. We’ve been here ever since. Jon: Why the move? Aki: Well,...
March 15, 2020
By Professor Nancy Rapoport, University of Nevada Dear Readers: The marvelous, indefatigable Regina Logsdon just forwarded me this hypothetical: Post-confirmation, debtor/client gets upset with attorney. Let’s assume for this scenario that the attorney hasn’t done anything wrong – perhaps just a difference of opinion on a plan modification (or not). Debtor/client says ugly things to attorney – name-calling, etc. THEN...
Copy of Hildebrand-2016
June 16, 2024
Although it is easy for a consumer practitioner to skim over decisions relating to Chapter 11, occasionally, a Chapter 11 decision requires attention. This is particularly true when the decision is issued by a Circuit Court of Appeals. Here, compelling circumstances must be demonstrated to justify a post-confirmation amendment to a proof of claim.
December 20, 2020
(To be sung to the tune of Julie Andrews’ version of “These Are a Few of My Favorite Things” from The Sound of Music) Raindrops on roses, and whiskers on kittens, Bright copper kettles and warm woolen mittens– Hey, wait a minute, that’s not what I mean; It’s time that we focus on Chapter Thirteen. We’ve been Trustees for so...
April 14, 2019
By William J. Purdy, III, Simmons & Purdy (Soquel, CA) Hundreds of thousands of taxpayers in the past few weeks have looked at or at least thought about, Form 1099-A or Form 1099-C documents they have received. Some arrived in the tax year a debt was allegedly cancelled. Others are issued by financial instructions many years after they should have...

Looking to Become a Member?

ConsiderChapter13.org offers a forum to advance continuing education of consumer bankruptcy via access to insightful articles, informative webinars, and the latest industry news. Join now to benefit from expert resources and stay informed.


These informative sessions are led by industry experts and cover a range of consumer bankruptcy topics.

Member Articles

Written by industry experts, these articles provide in-depth analysis and practical guidance on consumer bankruptcy topics.

Industry News

The Academy is the go-to source for the latest news and analysis in the Chapter 13 bankruptcy industry.

To get started, please let us know which of these best fits your current position: