Page last updated at 00:01 GMT, Friday, 29 January 2010

A happy ending for our love affair with credit cards?

By Max Flint
Presenter, Radio 4

Credit cards being cut up
The UK's credit card debt has almost quadrupled since 1994

It's January so it must be time to cut up your credit card. Things that looked shiny and affordable in a shop window at Christmas do not look quite as cheap on your bill. Your flexible friend has just become your worst enemy.

You are not alone in reaching for the scissors. The latest figures suggest over two thirds of UK borrowers fail to pay off their balance every month and the average amount owed on credit cards is £3,175 per person.

We have been given access to money we do not have to buy things we do not really need. Credit cards have given us a thirst for things.

Every month there is a fresh something to buy, made in a factory employing skilled workers applying for more credit for some extra shopping.

Upward mobility

It is not all bad though. This flow of credit has been a key factor in the success of the global economy post World War II. This was also lucky for Frank McNamara, the man who came up with the idea of the modern credit card.

He created the Diners Club Card in 1949, and a year later the club boasted 20,000 members.

This first credit card was actually a piece of paper that would be accepted as payment in some New York restaurants.

Flexible Friend or Foe, with Max Flint, is on Saturday 30 January on Radio 4 at 2000 GMT and repeated on Monday 1 February at 1500 GMT
See more details here

By the early 1960s the US had got into the habit and consumers were holding two or three different cards each.

Travelling salesmen loved the convenience of paying for petrol, food and hotels all with one card. It became a symbol and a tool for upward mobility.

Privilege costs

Britain was a bit more reluctant. Barclays launched a credit card in the UK in 1966 but had to conquer negative attitudes to debt and getting things "on tick".

The bank used cinema adverts showing a girl in a bikini going shopping carrying only a Barclaycard. The advertising strap line was simple - "All a girl needs".

Barclaycard was right, the credit card was all girls and boys ever needed.

Barclaycard advert in the 1970s
Barclaycard was the first UK credit card to launch in 1966

It gradually replaced cold hard cash to such an extent that paper money stopped being accepted for some transactions. With a card you could buy a car, without one you couldn't even rent one.

The ease and simplicity of credit cards has never been in doubt. The Barclaycard bikini girl and the "flexible friend" Access card adverts in the 1970s were about the convenience of the card versus old-fashioned money and cheques, but privilege comes at a cost.

Once cards were widely accepted, it was time for the banks to start making money.

Enter the idea of a fee, an annual amount for the privilege of holding a card.

When the fee was imposed, the banks noticed that consumers did not seem to mind.

Charges that were unacceptable on bank accounts passed relatively unnoticed on cards. It was an important lesson.

Spending binge

As the sharp elbows of supermarkets and even car manufacturers entered the credit card market, getting a card became easier.

Just like in the US, British people started to hold two, three or four cards and with familiarity came complacency. Outstanding balances crept up and people started paying less and less each month.

What the banks call the "low risk revolver" had arrived, customers who did not pay off their cards in full and were happy to pay high rates of interest each month.

The profits from fees were tiny compared to 25% interest charges, so "no fee" cards were rushed in. Banks then bundled up our debts and sold them on as securities, making a fantastic profit merry-go-round.

Diners Clucb Card logo
Frank McNamara created the credit card in 1949 - the Diners Club Card

So we were encouraged to spend, spend, spend, receiving blank credit card cheques in the post and having limits raised every time we hit the credit ceiling.

As the late 90s merged into the early noughties it was "shop to drop" time and our credit cards gobbled up the latest TVs and the furthest holidays.

Boom and bust

But when the credit tap was turned off our debts were huge, and currently the total UK outstanding card balance is 383% higher than in 1994.

Our spending spree relied on an expanding economy but when the credit disappeared, our spending shut down and the consumer-based economy started to shrink, which is why so many people are cutting up their cards this month.

The cycle of Christmas boom is always followed by January bust. It is human nature. Next Christmas we will probably be "maxing out" the cards all over again to keep getting what we want.

The lesson from the history of the credit card is quite simple really. We are trapped. If everybody in Britain cut up their cards, the spending-starved economy would die in days.

Yet if we keep splashing out we can keep our economy going and by extension our jobs, houses, cars and holidays.

The last word in this history goes to the inventor of the credit card, Frank McNamara.

A year after he set up Diners Club he sold his stake in the company believing cards were a fad which would never catch on. He died seven years later, flat broke.

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