A breakthrough in credit card technology in the 1960s was the catalyst for the popularization of credit cards as a payment method. An IBM engineer named Forrest Parry is credited with putting magnetic stripe on the back of cards so consumers could “swipe” their information at a point-of-sale terminal. Magnetic tape was originally used to store audio information and Parry was looking for a way to get it to hold cardholder information to put on a credit card. Legend has it that Parry’s wife, who was ironing, suggested that he iron the ribbon on the card and thus the magnetic stripe was born.
With technological advances come those who try to take advantage of them. As credit cards grew in popularity, so did scammers who used their own methods to make bogus charges using someone else’s card information. The easy access of swiping a card meant thieves could use a card they found or stole. The most sophisticated developed a process known as skimming in which the thief could bypass the information with his own reader to steal the cardholder’s information.
More secure technology was developed in France in 1984, when microprocessors were built into cards that could be read by specialized payment terminals. In 1994, all credit and debit cards in France used this technology, which, combined with a PIN, or personal identification number, added additional layers of protection to the payment process.
Soon other countries developed their own credit card chip systems, but since card readers were not interchangeable, someone traveling to another country would have to swipe their card through the reader instead of reading the chip. The need for a standardized payment system became a global issue and in 1994 three international payment processors, Europay, MasterCard and Visa, began developing a global chip specification for payment systems.
In 1996, the first specifications for EMV chips were published, with later versions. The most significant advance in the field of credit card chips came with the advent of contactless payment systems, in which a credit card chip could be read by holding it up to an enabled payment terminal. This could be done with Near Field Communication (NFC), a type of radio frequency that was used so that a card’s chip and the point-of-sale terminal could “talk” to each other. Over time, card information could be stored on smartphones and wearable devices and read by terminals using the same NFC technology.
How do credit cards work?
When you insert your chip card into a payment terminal, or wave your card information to make a contactless payment, a brief back-and-forth conversation takes place between your card-issuing bank and the merchant’s bank at the which determines whether you have enough credit left on your card to complete the transaction, whether the transaction needs to be authorized, and other technical details necessary to complete the transaction. This information that is exchanged is encrypted to prevent access by sophisticated fraudsters who may use techniques to try to obtain authorization information.
Credit cards and credit scores
Anyone who has a credit card or other type of bank loan has a credit score. That three-digit number can determine everything from how likely you are to get approved for a new loan to what interest rates you’ll be offered. This can affect not only the APR on your credit card, but also the interest you’ll be charged on other types of loans like mortgages, car loans, and student loans.
Credit scores and credit reports are used as a type of financial identity to identify your creditworthiness based on your loan servicing history. This includes things like how much debt you’ve taken on relative to your maximum credit limit, your history of on-time payment behavior, and how many new loans you’ve opened in a recent period of time.
For most of history, lending was based on reputation. A lender decided whether to approve a prospective borrower based on word of mouth or simply on how the lender judged the character of the person applying for the loan.
This all changed in the 1950s, when engineer William Fair and mathematician Earl Isaac created a standardized system for assessing a person’s creditworthiness based on an unbiased scoring system. Originally known as the Fair Isaac Company, the current FICO score debuted in 1989 and has a scale of 300 to 850. It is based on payment history, amounts owed, length of credit history, types of credit used, and inquiries recent credit.
Although there are many different iterations of FICO Scores, and different versions have been published since its founding, the FICO Score is still generally the standard way of identifying someone’s credit standing.
Credit card rewards programs
Rewards programs have been around as long as people buy and sell goods. Depression-era families collected teaspoons included in every box of Wheaties, which later gave way to paper coupons that could be hoarded and redeemed as points for household items. One of the most popular reward programs was S&H Green Stamps, in which consumers could collect stamps from vendors such as grocery stores, gas stations, and department stores and redeem them for items from the S&H catalog.
These types of loyalty programs paved the way for airline affinity programs, which began with the American Airlines frequent flyer program in 1981 and spread to multiple airlines and hotel brands around the world. Credit cards began issuing their own multipurpose rewards programs, including cash back rewards (launched by Discover in 1986) and American Express’ Membership Miles (later renamed Membership Rewards) in 1991.
Now, credit card rewards have become ubiquitous and desirable, offering a wide range of redemption options, uses and values, and driving consumer demand for new rewards cards. According to the study by J.D. Power on buying credit cards in 2021, 22% of respondents cited rewards as the top reason for choosing a particular card.
