Discover Card: History of the Credit Card, Perks, FAQs

What Is Discover Card?

Discover is a credit card brand that is issued by the American financial services company Discover Financial (DFS).

Originally issued by retailer Sears, Roebuck & Co. in 1985, Discover cards launched nationally in 1986, and first distinguished themselves for their reduced fee structure and pioneering cash-back rewards program. Discover has been an independent company since 2007. Today, Discover Cards are among the most widely accepted cards in the world, along with Visa (V), Mastercard (MA), and American Express (AXP).

History of Discover Card

Discover was created by a subsidiary of Sears in 1985, when many individual retailers and businesses were introducing branded credit cards for their individual stores to their customers. Discover quickly distinguished itself from the competition by charging no annual fee and offering one of the first cash-back rewards programs.

Discover originally was slow to grow, as few competing retailers were willing to accept the Sears department store card. Discover gradually expanded its network and is now accepted in 99% of stores that accept credit cards and in 200 countries. As of 2021, Discover is the seventh largest issuer of cards globally.

How Discover Cards Work

From a consumer’s perspective, Discover cards may seem quite similar to those offered under competing brands, such as Visa or Mastercard. However, behind the scenes are some important differences between the workings of Discover cards and those of its competitors.

We can see this by comparing Discover to Visa cards, for example. Whereas Visa simply licenses the use of its brand name to issuing banks, which then offer Visa-branded credit cards to their customers, Discover actually issues credit cards directly, using its own brand.

For this reason, Discover Financial earns interest income from its credit card customers, in addition to charging payment processing fees to the merchants that accept the Discover card as payment. Visa, by contrast, generates revenue from its payments network but does not directly profit from the credit card balances of its end user. In this way, Discover’s business model is more similar to that of American Express, which is also a direct issuer.

With this in mind, it makes sense that Discover cards have historically offered attractive terms to attract new users, such as being the first major credit card brand to offer cash-back rewards. After all, the company’s profitability relies on increasing not only the card’s acceptance among merchants (thus boosting transaction processing fees) but also the average outstanding balance of their cardholders.

Incentives to encourage customers to borrow more using their Discover cards, such as increasing credit limits or waiving annual account fees, make sense given Discover Financial’s overall business model.

Discover Cardholder Perks

Discover offers cards that primarily earn cash back, as well as one that offers generic airline miles (Discover it Miles). Discover’s Cashback rewards program provides a percentage back on all purchases, with 5% cash back on rotating spending categories and merchants on eligible spending up to $1,500 each quarter (with 1% after that) and 1% on all other spending.

The following Discover cards earn Cashback rewards:

• Discover it Cash Back
• Discover it Gas & Restaurants
• Discover it Student Cash Back
• NHL Discover it

Other Discover cards have a variations on the cashback rewards structure. The Discover it Chrome and Chrome Student cards offer 2% cashback on restaurant and gas purchases and 1% on other spending.

A unique feature of Discover cards is that they automatically match all cashback rewards earned in the first year, which allows savvy consumers to maximize rotating 5% cash-back categories to get 10% cash back on purchases in their first 12 months. This makes the first year of having a Discover card an excellent reward rate for credit card churners.

Example of a Discover Card

Let’s say that Mia is considering applying for a new credit card. When researching her options, she notices significant variation in the terms and features offered by the various cards. For instance, plain vanilla cards offer low fees in exchange for few—if any—rewards programs, while other cards, such as the Discover it Cash Back offered by Discover Financial, offer more generous rewards programs and cash-back benefits.

Although these differences are sometimes explained simply by the different annual percentage rates (APRs) and account fees associated with the cards, Mia learned that these variations are also caused by the distinct business models employed by the major credit card brands.

While some companies, such as Visa, generate money primarily from transaction volumes, other companies—such as Discover Financial and American Express—also lend money directly to their cardholders. For this reason, the companies that issue cards directly to their customers have an added motivation to offer rewards programs and other features that incentivize their customers to borrow more heavily on their cards.

The Bottom Line

Discover cards are widely accepted and offer competitive rates and rewards. If used conscientiously, the automatic cash-back match during the first year offers a rewards rate that can be hard to beat with other personal credit cards currently on the market. Consumers should remember that similarly to companies like American Express, because Discover is a direct issuer, it makes money when customers have more debt and are not paying off their balances each month. As with all credit cards, being conscious of your spending is key.