Swipe Now, Pay Later: The Credit Card Trap

There are over 2.8 billion credit cards in use worldwide, with more than 1 billion of those in the United States alone. When including all credit, debit, and prepaid cards, the total number in circulation exceeded 17.45 billion as of late 2023. Visa powers over 4.3 billion cards globally.

The U.S. credit card industry is operating at an unprecedented scale as outstanding balances climb to an estimated $1.28 trillion in early 2026. Average revolving balances per cardholder now stand at roughly $6,523, underscoring the expanding role of credit cards as both a payment mechanism and a financing tool in an environment defined by elevated prices and persistent inflation.

Nearly half of U.S. cardholders carry balances from month to month, a trend that has become increasingly normalized as consumers rely on credit to manage everyday expenses. This sustained borrowing has coincided with historically high interest rates, with average annual percentage rates exceeding 20%, significantly boosting interest income across the industry while simultaneously raising repayment challenges for borrowers.

In anyone’s opinion, an APR of over 20% is usury, i.e., extortion. So how did all this get started? Who came up with the bright idea of credit cards?

Birth of an Industry:

Frank X. McNamara was a moneylender. He had an office in the Empire State Building, from which he ran his small, private loan company called Hamilton Credit Corporation. The term ‘corporation’ made it sound like it was a major enterprise. Really, it was just one step up from a loan-shark business, but it paid the bills, and McNamara kept his eyes and ears open, looking for good business opportunities. Because that’s what Frank McNamara was. He was an opportunist.

It was 1950. World War II was over, and the U.S. economy was taking off. Everyone was hustling, and, if you played your cards right, you could go places and be somebody. And that’s what McNamara was doing – looking for an open door to the promised land of cash flow. He didn’t want to be a day labourer, working for so much an hour. He wanted his money to work for him. That’s why he went into the lending business. The way he figured it was by making small loans; the interest would trickle back into his pocket at a nice, steady rate. If he made enough small loans, the trickles would eventually form a river of money flowing his way.

It was called credit. And credit, in McNamara’s opinion, was where the action was. The way people thought was changing. They didn’t want to wait to buy the things they wanted. They wanted to gratify their desires right now. And that’s where McNamara came in. He gave them credit. He loaned them the money to buy what they wanted. They paid him back by making monthly payments, including an interest charge. The interest charge was McNamara’s profit.

It was simple and beautiful. Everybody was happy. McNamara was happy because his money worked for him. He didn’t work for his money. And his debtors were happy because they got what they wanted: a new car, new clothes, nice furniture.

One of McNamara’s best customers was a local businessman who came in once or twice a month and borrowed a moderate amount of money, which he paid back as regularly as clockwork. Since the businessman appeared to be prosperous, McNamara wondered why the man required frequent loans. So one day, McNamara asked him.

The businessman told McNamara that he had a number of department store charge accounts. A lot of his friends didn’t have any charge accounts because they couldn’t qualify for them. Still, they wanted to buy things from the department stores. Only they didn’t have enough money. In other words, they were between a rock and a hard place. They couldn’t afford the items they wanted to buy, and the stores wouldn’t give them any credit.

So the businessman loaned his department store charge cards to his friends and charged them a fee for the use of the card. Then he borrowed money from McNamara to pay off the cumulative charge card debts at the end of each month. The difference between the interest he paid to McNamara and the interest he charged his friends was his profit.

McNamara was impressed. The businessman had a good thing going. McNamara parked the information in the back of his brain and went about his business. Not long after, the businessman came in to make another loan. He told McNamara it would be his last.

“How come?” asked McNamara, hating to lose a steady customer.

“One of my customers skipped town,” replied the businessman. “Which means I’m stuck with the debt he ran up on my charge card. I can’t afford to take any more risks.”

McNamara nodded. He understood. Delinquent debtors were a common problem. McNamara got around the problem by padding his interest rates. His rates were high enough to cover the inevitable losses that were part of the credit business. Things happened. Sometimes people were unable to pay their debts. Smart guys knew this, allowed for it, and protected themselves. Smart guys spread the risk factor out to their customers.

Ralph Schneider, photo by Herman Hiller

Later the same day, McNamara was having lunch with his attorney, Ralph Schneider. The topic of discussion was how to recover an outstanding debt that McNamara found himself stuck holding. As the two men ate, they talked about the different methods of legal recourse available.

McNamara stopped and sat motionless. Right out of nowhere, a thought blossomed in his head. It was an idea of pure genius. A single charge plate usable at lots of different establishments. Instead of each store issuing a proprietary charge plate, which could be used only at one store, there would be one charge plate good at many stores.

Glancing around at the restaurant in which he was seated – Major’s Cabin Grill – McNamara realized that restaurants were the perfect candidates for his idea. Excited, he interrupted Schneider, who was babbling about litigation.

“Listen to this!” said McNamara, leaning forward. He proceeded to outline his grand idea.

Schneider liked what he heard. After asking a few questions, he told McNamara that he wanted in. He was willing to put up 15,000 dollars.

McNamara put up 25,000 dollars, which was a lot of money in 1950. They found another investor, Matty Simmons, who, once they explained the idea, was gung-ho.

McNamara leased a three-room office in the Empire State Building. The three men went from restaurant to restaurant in New York, explaining the advantages of their concept to the restaurateurs. A few months later, they had signed up twenty-two restaurants and one hotel.

On February 8th, 1950, McNamara, Schneider, and Simmons dined at Major’s Cabin Grill. McNamara paid for the meal with a brand-new charge plate. The name on the plate was Diners Club.

In its first year of business, Diners Club didn’t make a dime. In fact, it lost 58,000 dollars. But the idea caught on. More and more restaurants and hotels signed up. They couldn’t afford not to participate, not if they wanted to remain competitive. By the end of its second year, Diners Club had revenue of 6 million dollars, reporting a profit of 60,000 dollars.

The credit card industry was born.