50 years later, how the credit card has changed America

San Jose Mercury News (MCT) - They called it the Fresno Drop.

Fifty years ago this month, Bank of America mass-mailed to nearly every home in Fresno, Calif., a small piece of plastic called the BankAmericard. The credit card had arrived, a shiny corkscrew for each recipient to unbottle thousands of dollars in spending money that hadn't existed before they ripped open those envelopes.

That first taste went right to Fresno's head. By the second year, cardholders had racked up nearly $60 million in purchases. BankAmericard morphed into the Visa powerhouse. And a half-century later, as America embraced and then exported the concept of buying things with money folks didn't necessarily have, the whole world has gotten tipsy.

And following in the wake of the subprime mortgage mess, the credit card bender could end up being uglier than ever.

"Credit lubricated the economy in ways we couldn't have conceived of before," said Bella Berlly, a certified financial planner in Los Altos, Calif. "But as a society we became completely inebriated on it. Being able to just 'put it on my credit card' fueled the sense that you could do anything, like a Superman effect."

The world would never be the same. Diners Club, a so-called charge card that required complete payment each month, had come a few years earlier, the legendary brainchild of a wealthy New York financier caught cashless after a meal at a high-class steak joint.

But the Fresno Drop would pack a much bigger wallop. Dee Hock, the credit card guru who later turned the BankAmericard into the sprawling Visa network of member banks, was really the father of "the electronification of money," says spokesman Will Valentine at San Francisco-based Visa, whose corporate mantra is to "root out spending by cash and checks."

Along with its younger siblings like debit and prepaid cards, the revolving credit card _ which charges interest and lets customers make partial payments _ fundamentally changed not only the way Americans think about money, but America itself.

Santa Clara University finance Professor Meir Statman describes credit as "interwoven into our society." With consumers no longer tethered to cash on hand or in the bank, the financial realities of our lives _ how we save, spend, borrow and budget _ went through a sort of time warp.

Armed with plastic, consumers now could charge their way into glittering new lifestyles their parents could only have dreamed of.

"Before credit cards, credit came in small-dollar installment loans and people tended not to use them unless they really needed help," said Kathleen Keest, a former assistant attorney general in Iowa who now works with the Center for Responsible Lending. "When you had to go to your bank to get a personal note, you really thought about it. But when suddenly it's a piece of plastic in your pocket, debt almost becomes something that happens without thinking about it."

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The sea change has been extraordinary. Revolving debt, most of it from credit cards, stood at $1.5 billion in 1968, according to the Federal Reserve. This summer, it reached $969.9 billion.

Those 60,000 cards dropped into Fresno 50 years ago have mushroomed to 3.67 billion payment cards today, with more than two-thirds of them in circulation abroad.

It's a great big plastic world out there. Norm Magnuson with the Washington, D.C.-based Consumer Data Industry Association recalls buying a "TV on credit in the '60s, and my father about had a heart attack. Today you stand in line at Starbucks and people use credit to buy a $4 cup of coffee."

Magnuson says credit "gives you the opportunity to not only have a better standard of living, but you're also putting more money into the economy and it's being recirculated. Since two-thirds of our economy is based on consumer spending, the more consumers purchase, the better off the economy."

Companies like Visa and MasterCard, which maintain networks of financial institutions lending the money and collecting fees every time a card is used, have become spectacularly wealthy through this easy access to credit. Visa's recent initial public offering was the largest in U.S. history, while MasterCard's stock has soared nearly 500 percent since it went public two years ago, their markets overseas growing like wildfire.

But while most cardholders pay off their debt, there remains a very dark side to the credit card, "a deceptively simple device that has the capability of destroying you," says Adam Levin, co-founder of San Francisco-based credit.com.

Critical of the card issuers' heavy fees and aggressive marketing tactics, especially toward finance-naive student and low-income communities, Levin says "people have been bludgeoned" by credit card offers, often going to consumers already struggling with debt. "It's like taking a vampire and putting him in the middle of a blood bank."

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One study showed that about 70 percent of students at four-year colleges had at least one credit card, with average balances of more than $2,000. Former San Jose State University student Cynthia Uribe was one of those who succumbed to the on-campus sales pitch.

"I figured I could use it just for emergencies," says Uribe, now 24 and doing clerical work at a local hospital. "But I got more of them, from Best Buy and Macy's and MasterCard. And by the second year, I was using them for fun and pleasure. And making the minimum payment was so much easier than paying the whole thing."

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The debt snowballed. Uribe could no longer bear to look at the entire bill, paying the minimum due even as her interest rates climbed. Hiding statements from her parents and boyfriend, she felt "ashamed and dirty, like a drunk hiding alcohol around the house. I'd max out a card, but I kept getting offers for new ones."

Uribe hired a debt counselor, who has worked with the card issuers to restructure the $21,000 she owed. Assuming she avoids credit cards, Uribe's bills will be paid off in four years.

But many like her are still treading water. In 1977, U.S. households charged a little more than $100 a month on cards, or 3.4 percent of the average household income. By 1997, that figure had risen to $830, or 20 percent of average income. And more Americans are using "debt just to live," Keest says. "We're seeing low- and middle-income people using their credit cards because their paychecks no longer cover the basics."

Still, the middle-aged credit card seems destined for many happy returns. With issuers pushing prepaid cards and direct-deposit products that link your paycheck right to that plastic in your wallet, cash and checks seem like endangered species in the financial jungle.

"Globally, the Visa card is coin of the realm," says David Robertson, publisher of the payment-card industry newsletter The Nilson Report. "I can't use American currency or checks anywhere in the world like I can with Visa."

But in a delicious irony, wireless and other kinds of technology may soon free the credit card from that humble material that first brought it to life 50 years ago _ plastic.

"There will always be currency," Robertson says. "But there might not always be plastic cards."

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© 2008, San Jose Mercury News (San Jose, Calif.).