The Real Cost of Credit Cards
I get bashed often about my attitude towards credit cards. Responsible users (those who never carry a balance) are very proud of the rewards and benefits they provide. Other personal finance bloggers devote substantial time writing about the various rewards cards available to us, hoping to garner some extra income through affiliate links.
First, let’s acknowledge that while most credit card owners start off with the intention of paying their balances in full each month, many slip into the abyss of carrying increasing balances. You probably know people in that category. Credit card issuers love those people because they make lots of money from interest charges and punishment fees.
But I want to briefly address the behind the scenes processing fees that everyone pays, either directly or indirectly, from using credit cards. Some estimate that credit card processing fees alone cost consumers in excess of $50 billion yearly. There is a website that makes it easier for us to understand the real costs of using our own credit cards.
The site is The True Cost of Credit. It can provide you some eye-opening information about what fees are paid by the merchant when you swipe your card.
All you do is enter the first six digits of your card number. This is the “Issuer Identification Number” that contains no personal information. It just identifies the type of card and the bank that issued the card. This number allows the site to recognize your card. Using that information, the site tells you the actual fees charged to the merchant when you make a purchase. The site also rates the cost of your card on a scale with other types of credit cards. Take a look – you will be intrigued, I hope.
Some of you have likely entered the “I don’t care” mode, thinking that since you aren’t paying those fees yourself, it doesn’t affect you. If that is you, please read on.
If you really believe that merchants are eating all of these interchange fees themselves and not building them into retail pricing, you are probably an oblivious consumer. I will attempt to persuade you back to reality with some data.
The National Retail Federation (citing a GAO study) estimates that the interchange fees that their merchant members pay to accept Visa and MasterCard cost the typical American household an average of $427 in 2008. Other fees the stores pay, including interchange costs for American Express and Discover, increase that total to $600. (Source)
How many of you received $600 in credit cards rewards last year?
Now let’s assume that you are a big time credit card spender and exceeded $600 in rewards last year. Do you feel super-smart and good all over?
Think about it: someone is paying for your rewards. (I think you are, but let’s not debate that now.) The folks who are too poor to own a credit card are paying for your rewards, in the form of higher retail prices. They pay the same prices you pay, but receive no “reward” from paying cash. How about that? (That last question is for you liberals that use credit cards.)
Some merchants would like to charge card swipers a surcharge but merchant agreements don’t allow them and some states have banned them. (Nice lobbying, VISA.)
When I first considered this, I was concerned about receiving “free” airline tickets from our rewards card, paid for by people who couldn’t qualify for a card.
Then I realized that I pay income taxes while most of those folks probably do not. So I got over it.
Now you know the real cost of using your credit cards.