"At first, fees were not considered to be a mainstay of the business. They were virtually an afterthought, I think," says Mandell. "As the credit card companies got more and more competitive, they really started to target users who were most lucrative to them: people who carry a balance from month to month," he says.
In their quest for new customers, card issuers offered teaser interest rates of zero percent for balance transfers, and savvy credit card users took them up on their offers to save money.
"So the card companies, through competition, ended up reducing the usual sources of income," says Mandell. "Many -- if not most -- gave up annual fees in the '80s. So now, without the annual fees, they were dependent on merchant discounts, which were very low because of competition. Then they began squeezing those and began looking around for other sources of income," he says.
Fees turned out to be pretty lucrative for credit card companies, and they never looked back.
Credit card reformsIn the present, credit cards have developed a reputation for some ethically questionable -- from a consumer standpoint -- business practices. So much so that regulators moved to rein in credit card companies very recently.
On Dec. 18, 2008, the Office of Thrift Supervision, the Federal Reserve Board and the National Credit Union Administration adopted a set of regulations to protect consumers from the most egregious lending practices, such as double-cycle billing and universal default. The regulations will go into effect July 2010.
Included in the reform package are rules that prohibit raising interest rates on current balances -- except index-related movement on variable-rate cards -- and disallow rate changes in the first year a card is open unless the rate change was disclosed at the beginning of the business relationship.
In the midst of a credit recession, card issuers say the new rules will hurt their bottom lines and affect the interest rates and credit limits that customers receive.
The future of credit cardsDespite the belt tightening currently going on in the industry and the economy at large, credit cards won't be disappearing anytime soon.
"Credit cards won't ever go away. Those of us who travel for a living realize how dependent we are on them. But the nation has to learn how to save again," says Mandell.
Evans predicts that the next few years will be rocky for credit card companies as the country re-evaluates its saving and spending habits.
"Most people are skittish about adding more debt now, and banks are skittish about lending money to people who may not be able to pay it back. And the people who are most interested in using credit cards at the moment are precisely the people that the banks don't want on their books," says Evans.