Retailers also reentered the credit card industry with a number of new innovations. By far the most important of these was the refinement of the concept of revolving credit. As we have seen, retailers offered credit in various forms to their customers to stimulate sales of goods and retain customer loyalty. As in other industries, retailers considered credit to be a costly but necessary expense of doing business. Presumably, the cost of the credit operation could be buried in the prices charged for the merchandise.
As department store chains expanded and began to pursue less affluent segments of the population, they were faced with a new problem: How could credit be offered to this new market? Open book credit within a charge account system was not considered feasible because the higher expected collection costs and lower expected average transaction would make such an arrangement unprofitable.
The first step toward revolving credit was taken in the late 1930s by Wanamaker’s of Philadelphia, which allowed customers to repay charge accounts in four monthly payments without interest. The first store to actually use the revolving credit system—or “rotating charge account,” as it was called at that time—appears to have been the L. Bamberger & Company department store of Newark, New Jersey. Bamberger’s rotating charge account was begun by William B. Gorman, who would introduce it in 1947 at Gimbel Bros, of New York.
With this plan, the customer was given a fixed credit line for the purchase of soft goods such as clothing. Big-ticket items could be financed, as always, through the regular installment plan. Each month the customer was required to repay one-sixth of the balance plus an interest charge of one percent on the unpaid balance. Gorman set a six- month limit because he believed that it was “psychologically unsound” for a customer to keep paying for merchandise after it had worn out. Following Gorman’s introduction of the rotating charge at Gimbel’s in 1947, BusinessWeek (8 March 1947) summarized the advantages of the plan:
For Gimbels, which caters to customers with low or moderate incomes, the plan is peculiarly suitable. It permits extension of credit to those who otherwise could not qualify. For example, a $50-a-week salary might be the minimum for granting a regular charge account, but a rotating account can be offered to a customer earning as little as $25 a week, if other factors are favorable. Such customers are unlikely to have more than one charge account, even of the limited variety, which helps assure their loyalty to Gimbels.
The rotating plan also enables the store to extend credit to another consistent buyer who would be a poor risk otherwise— the “career girl” who earns a modest salary and spends most of it on clothes. The plan is probably more advantageous to stores in metropolitan areas, where the population is relatively transient, than to those in smaller, more stable communities. Gimbels will plug it as a means of tiding families over buying peaks Like Christmas and Easter.
The original revolving charge plan had been adopted by a number of stores, including Filene’s of Boston and Bloomingdale’s of New York, before it filtered down to Gimbel’s after the Second World War. However, it was not until several years later, in 1956, that J. L. Hudson’s in Detroit added the last innovation to the credit system we know today— the interest-free period. Under Hudson’s plan, customers could either repay the balance within thirty days without a finance charge or as little as one-quarter of the outstanding balance each month with a finance charge. It should be noted that with this final innovation, the department stores could combine their three types of credit programs—the regular charge account for preferred customers, the revolving charge account for customers who preferred to pay over time, and the installment account. In so doing, stores were eventually able to realize cost savings in handling their credit transactions.
Following the war, a number of large retailers joined together to form cooperative card operations similar to those begun in the 1930s. In 1948, a number of major New York department stores, including Bloomingdale’s, Arnold Constable, Franklin Simon, Gimbel’s, and Saks, began a charga-plate group; the standard charga-plates they mailed to their customers were usable at any of the cooperating stores. The system offered several advantages, the primary one being that persons who had charge accounts at several stores did not have to carry a large number of heavy metal plates.
Since not all customers had accounts at all the stores in a charga- plate group, it was a common practice to notch the cards so that they would fit only the imprinters of stores with which a customer had an account. The central agency that handled distribution of the plates also handled servicing and changes of address. In addition, the agency served as a type of credit bureau: stores investigating a new customer’s credit application could see whether the applicant had charge accounts in other charga-plate stores.