The Credit Card business began with the issuance of the first "charge-a-plate" around 1930.

Stamped with account information, individual stores issued these small metal plates to encourage customers to shop and buy during the Great Depression when cash was tight. A card could be used to charge purchases at one specific store only and balances were expected to be paid off in full by the due date of the following month.

The "Major Credit Card" - that was not tied to one specific store - got its start in 1950 after a salesman found himself unable to pay for a dinner while dining out.

Vowing he would never again be caught in such a situation, Frank X. McNamara and his two partners started Diners Club by striking an agreement with a fourteen restaurants in in New York City. The restaurants agreed to accept the the card - and its guarantee of payment by the Diners Club company - in lieu of cash.

Diners Club cards were subsequently given out to 200 of McNamara's associates who needed to dine out often with clients. Membership grew quickly as new customers applied for the card and more restaurants signed on. By the end of 1950, Diners Club had 20,000 customers and was accepted in over 1000 restaurants. Following this model, but courting all retailers and not just restaurants, banks began issuing their own cards.

The concept of "revolving credit" - wherein a customer did not have to pay off his account as long as he made his minimum payment each month - emerged in 1958 when Bank of America launched the BankAmericard in Fresno, California.

Then the industry was revolutionized in 1968 when Dee Hock convinced Bank of America to give up ownership and control of its BankAmericard credit card program so that all credit card issuers could operate under a single umbrella called Visa, a card that Mr. Hock envisioned as being accepted by all retailers everywhere.

Between 1975 and 1980, getting a consumer loan of any kind became very difficult.

The U.S. was experiencing double digit inflation and on October 6, 1979, the Federal Reserve adopted new policy procedures that led to skyrocketing interest rates (and two back-to-back recessions.) The cost of money was high, there were few mortgages or loans of any kind being offered, and interest rates kept climbing.

What stopped loans from being offered was the cost of money for lenders. They were not able to borrow money cheaply and, at times, found themselves required to lend money at a rate less than the rate at which they had borrowed it from the Federal Reserve.

New York's laws limited interest rates to 12% and most banks had been chartered in New York. Thus, most big lenders were unable to charge consumers more than New York's 12% annual interest even if those consumers lived in other states.

The rate of inflation exceeded the amount of interest Citibank was allowed to charge its credit card customers under New York usury laws in that CitiBank was paying 20% for money, but could charge customers only 12%. The corporation - which had extended itself into the credit card business - was going broke.

The result is that these banks did not make loans and credit was very tight.

In 1980 South Dakota's economy was, itself, in trouble. A farming state, the gas crisis was crippling farmers who were getting $2.20 for a bushel of wheat, but paying 42 cents a bushel to haul it.

Bill Janklow, Governor of S. Dakota at the time, knew he had to do something. So when CitiBank called him with a proposal to bring jobs to the state and help boast the economy, he listened.

South Dakota had tight consumer protection laws governing what a lender could charge a consumer for a loan. There were also strict limits on rates with - for instance - one interest rate for new cars, and another for used cars.

But with lenders unwilling to lend money, and its economy in trouble, South Dakota decided to take a radical step and abolish its “usury” laws - laws that limited prohibitively high or unfair interest rates for loans to consumers - in order to encourage banks to relocate there.

Before long five states had no usury laws (laws against excessive interest.) This fact - coupled with an obscure Supreme Court ruling called The Marquette Bank decision - set the stage for a different playing field and a reversal of fortunes.

In Marquette National Bank vs. First of Omaha Corporation The U.S. Supreme Court ruled that a bank could export its interest rate to other states.

This meant that a bank could move its headquarters to a state with no cap on interest rates, then offer loans with very high interest rates to other states.

Whereas the amount banks could charge was previously governed by the laws of the state in which they were chartered (founded), the amount they could charge now hinged on where the credit decision was made.

For instance, if the decision to make a loan was made in South Dakota and South Dakota had a 25% interest ceiling, a bank located there - and making its decisions there - could charge that 25% rate to anyone, even to a person in Alaska.

As a result, in 1981 Citibank moved its credit card operation from New York to South Dakota.

The business took off in Sioux Falls so that, eventually, all the big banks decided to move there.

Since these banks still had offices and assets on the East Coast, Delaware copied South Dakota's legislation and Delaware became the credit card center of the East Coast.

For the first time in U.S. history there was no legal limit on the interest rate that banks could charge on credit cards and the profits of credit card lenders soared. Lenders charged whatever rates they chose and justified it on the claim that credit card debt is an "unsecured loan" with a higher risk factor than other loans.

Deregulation followed which allowed even more people to qualify for - and get - credit cards so that the industry spread to major credit card processing centers throughout the U.S.

With no limits on the amount of interest they could charge, credit card companies then turned to Madison Avenue to sell the American public on running up credit card debt.

They also turned to consultants for innovations on how to made credit cards even more profitable. One of these was Andrew Kahr, whose innovation was to change the minimum required balance.

Instead of requiring a monthly payment of 5% of the outstanding balance on an account as minimum payment, he recommended that the amount be reduced to 2.5% of the balance or less.

Kahr deduced - correctly - that if customers were able to pay less each month, they would borrow more because his research showed that making the minimum payment eased consumer’s anxiety over carrying debt.

Kahr also convinced his corporate clients to offer a zero percent introductory rate to hook customers who, if they miss one payment or are late, lose that low rate and are re-priced.

Kahr's formulas reaped huge profits for the credit card industry because a high balance account is much more profitable to them than a low balance account and tens of millions of people now carry high balances. (The industry calls this this high interest demographic - which is increasing - "the sweetspot.")

The final blow came, perhaps, in 1996 with another Supreme Court decision when Smily vs. Citibank lifted restrictions on fees credit card companies could charge. Prior to Smiley the penalty for a late payment was between $5 and $10. After Smiley the penalty went from $5 to $39.

Since Smiley, credit card companies have doubled the amount of revenue they get from penalty fees which, in themselves, have become an enormous profit stream.

Today, millions of credit card solicitations and credit card bills pass through the huge post office in Sioux Falls every day along with billions in credit card payments from around the world.

Hundreds of billions of dollars are made by credit card lenders every year. In 2004 MBNA profits were half again greater (150%) than McDonalds' profits.

Around 144 million Americans have credit cards. Of these, around 50 million customers pay their credit cards off every month and - because of this - are called “deadbeats” by those in the industry.

The rest are "revolvers” who provide an ongoing income stream. As Andrew Kahr noted, companies view those who fail to pay in full and on time as profit sources. And with an average debt of $8,000 per family (some estimate it's much higher) it is from these folks that the major profits are made, to the tune of about 1.5 Trillion dollars per year.

Many of these lenders charge their "revolvers" an annual interest rate of between 25-30% and half of their profits are generated by various fees they charge in addition to interest charges.

In addition, credit card companies have used the digital revolution - the amassing of information such as databases - as a goldmine.

They have access to a huge reservoir of information that the credit bureaus collect for them, including whether payments are made on time.

A credit card company can sift through this information, see who’s a “revolver” and who isn’t, then target those consumers who do not pay off their accounts with attractive offers that morph into high interest accounts.

In the past, these lenders - who can change rates, terms and conditions with impunity and minimal notice (typically 15 days) - and who fight legislation that would inform consumers about the true cost and risk of credit card debt - would have been considered “loan sharks.”

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