83 Credit Cards

Introduction

Ever since credit cards were introduced in the mid-20th century, they have become an essential piece of technology for consumers worldwide. In today’s age, the ability to use credit cards is unmatched in how we spend money by offering convenience and flexibility. Along with these benefits come other significant changes in consumer behavior, typically through compulsive buying and overspending to the consumer (Khare, 2013). These impacts have considerably changed how consumers use our money and spend our hard-earned money. This chapter will examine the social factors that play a part in these behaviors and how they relate to you and the rest of society.

Connection to STS

The study of credit cards and how they impact consumers can be categorized through science, technology, and society (STS). Looking at STS through technological innovations such as credit cards, we can see the influence on social practices and individual behaviors accompanying credit cards. You can assume that many readers of this chapter have used some payment method in the past week. Analyzing how spending money has a considerable impact throughout our day shows how dependent a form of payment like credit cards is on our lifestyle (Hodson et al., 2014). Understanding these connections helps us appreciate the broader societal effects of credit card usage and gives a gateway for addressing the associated challenges.

History of the credit card

Going back to ancient Mesopotamia, the first recorded interaction between a seller and a buyer was able to pay for a product later. The most notable credit card event that resembles today goes back to the 1950s. Frank McNamara and Ralph Schneider introduced the Diners Club Card as the first charge card with significant popularity (Frankel & Lupini, 2024). This card was influenced by Frank leaving his wallet at home while going out to eat. This event would lead to the first modern charge card. The card would work when the customer pays using the card, and the place of service would send a bill to the Diners Club, then send money from the Diners Club to the place of service’s bank. The diner club would make a small amount of money off each transaction, and the customer would have to pay all the bills at the end of the month (Frankel & Lupini, 2024). In 1958, one of today’s primary credit card distributors, American Express, released their first charge card. One of the factors of ease of use of the credit card was invented in the 1960s by an IBM engineer, placing magnetic tape on the back of the card to identify the consumer (Frankel & Lupini, 2024). The consumer would swipe the card, and the place of service would be able to have their information. This would be the invention of the swipe stripe, which would become the standard way to use credit cards, and virtually all cards today have it. In the 1980s and into the 90s, credit cards introduced a way to get consumers to spend more: a rewards program for spending money. These credit cards would introduce things like cashback to become a desired tool when checking out (Frankel & Lupini, 2024).

Effects

Through techniques that credit card companies bear on, credit cards can activate the reward feeling in the brain. This level of enjoyment can lead to an increase in spending and an increase in compulsive buying (Banker, 2021). Compulsive buying is the craving to continue buying more than you need or can afford. When consumers utilize credit cards, the act of purchasing can make it hard to realize that you are losing money when swiping the card. This psychological change can persuade you to think you have more money to spend than you actually have (Emamzadeh, 2022). On the other hand, while using cash, you typically can feel a more significant loss of monetary value. This mental belief that you have to give something to get something can lead to less compulsive buying and realizing what you are giving up to receive your purchase (Lo & Harvey, 2011). This transaction method can lead to a pattern of compulsive buying, where individuals continue to spend more money to get that short-term satisfaction, often leading to financial consequences down the road (Khare, 2013).

The satisfaction of purchasing through credit cards has been shown to allow consumers to spend money more easily. This habit can lead to debt. Debt is something of value that is borrowed and is planned to be given back, and in looking at credit cards, it would be money (Hodson et al., 2014). Along with this increase in access to credit over the years, debt has become a primary concern for many. Overconsumption can now lead to high costs in the future as their debt has to be paid off. This debt between many people can add up and have severe consequences. This can lead to economic instability because consumers have less buying power, which is vital for economic growth(Adrian et al.). This instability can be seen through the great depression and the 2008 financial crisis. Much of this can be tied to having more available options to use credit to consumers who need to be more informed on how to use credit properly (Emamzadeh, 2022).

The (iN)Equity of Credit Cards

Credit cards, like most technological innovations, have the potential for bias. This is likely not immediately apparent to the average user, but the concept of credit is itself flawed. Credit card algorithms, credit score calculations, and fraud detection algorithms were all developed with models that consider the demographics of credit users and which groups are more “at-risk” than others (Paldino et al., 2024). This creates the potential for undue bias toward certain people groups: the economically disadvantaged, racial minorities, and women.

Furthermore, women have always been at a disadvantage in the financial sector. As recently as 1974, women were unable to open a line of credit without a male cosigner (husbands, fathers, brothers…). This changed with the passing of the Equal Credit Opportunity Act (ECOA), which banned financial discrimination based on sex or marital status (Kratz, 2023). Two years later, in 1976, amendments were made to the act to include all demographics, including race, religion, age, national origin, and more. This legal change meant that credit algorithms had to be developed so that applications for credit could rely on “creditworthiness”. Unfortunately, unintentional biases were then implemented into these algorithms at a systemic level.

While the algorithms may be blind to the demographics of the individual behind the credit, they treat individuals based on their credit usage, favoring individuals that have low credit usage, many open credit lines, and fully on-time payments. This largely disfavors economically disadvantaged classes: people that would need to use more credit (even if all of their payments are on time), people that don’t have the opportunities to diversify their spending (open multiple credit cards, have house and car loans, etc.), and people that may be in periods of instability. As the technology continues to develop, it is more important than ever to review how we determine “creditworthiness” and who is affected the most.

Conclusion

Credit cards have undoubtedly become a large part of consumer behavior while having some controversial consequences. While they make it easy to purchase and an easy way to use credit, they also can lead many to compulsive buying and overspending. The rising debt also poses a concern for consumers and how it can affect the economy. A large part of these concerns come from uninformed consumers on how to use credit cards responsibly. Understanding these psychological and economic impacts shows how credit cards are a large part of our way of life and how we spend our money.

References

Adrian, T., Gaspar, V., & Gourinchas, P.-O. (2024). The fiscal and financial risks of a high-debt, slow-growth world. International Monetary Fund. Retrieved from https://www.imf.org/en/Blogs/Articles/2024/03/28/the-fiscal-and-financial-risks-of-a-high-debt-slow-growth-world?form=MG0AV3

Banker, S., Dunfield, D., Huang, A., & Prelec, D. (2021). Neural mechanisms of credit card spending. Scientific Reports, 11(1), 4070–4070. https://doi.org/10.1038/s41598-021-83488-3

Emamzadeh, A. (2022, June 27). Compulsive Shopping: A Guide to Causes and Treatment. Psychology Today. Retrieved November 13, 2024, from https://www.psychologytoday.com/us/blog/finding-new-home/202206/compulsive-shoppingguide-causes-and-treatment

Frankel, R. S., & Lupini, C. (2024, October 9). History of Credit Cards: When Were Credit Cards Invented? – Forbes Advisor. Forbes. Retrieved November 13, 2024, from https://www.forbes.com/advisor/credit-cards/history-of-credit-cards/

Hodson, R., Dwyer, R., & Neilson, L. (2014). Credit Card Blues: The Middle Class and the Hidden Costs of Easy Credit. The Sociological Quarterly, 55(2), 315–340. https://doi.org/10.1111/tsq.12059

Incekara-Hafalir, E., & Loewenstein, G. (2009). The impact of credit cards on spending: a field experiment. Available at SSRN: https://dx.doi.org/10.2139/ssrn.1378502

Khare, A. (2013). Credit Card Use and Compulsive Buying Behavior. Journal of Global Marketing, 26(1), 28–40. https://doi.org/10.1080/08911762.2013.779406

Kratz, J. (2023, March 22). On the basis of sex: Equal credit opportunities. National
Archives and Records Administration. https://prologue.blogs.archives.gov/2023/03/22/on-the-basis-of-sex-equal-credit-opportunities/

Lo, H.-Y., & Harvey, N. (2011). Shopping without pain: Compulsive buying and the effects of credit card availability in Europe and the Far East. Journal of Economic Psychology, 32(1), 79–92. https://doi.org/10.1016/j.joep.2010.12.002

Montgomerie, J. (2006). The financialization of the American credit card industry. Competition & Change, 10(3), 301-319. https://doi.org/10.1179/102452906X114393

Paldino, G.M., Lebichot, B., Le Borgne, YA. et al. (2022, September 28) The role of
diversity and ensemble learning in credit card fraud detection. Advances in Data Analysis and Classification 18, 193–217 (2024). https://doi.org/10.1007/s11634-022-00515-5