The Real Cost of Credit Cards

January 19, 2010 by  
Filed under Debt and Credit

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.

All of that is generally OK with me. I just think people should know – including responsible users – what card usage really costs them and everyone else.

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.

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20 Responses to “The Real Cost of Credit Cards”
  1. Marc says:

    tragedy of the commons, I will still pay even if I stop – so I might as well maximize my benefit.

    My 2 credit cards were well above average. I did get about $300 back in bonuses.

  2. Philip says:

    Are you saying that I should not then try to get back some of what they are taking from me? If they are taking the $427 from me in higher costs why not defray the costs until there is something that happens that makes it go the other way. I know that it starts with 1 person, but honestly if I quit using a rewards card then I would just be out the money I might earn, the price would not drop for me then.

    I see the costs that occur, I just don’t want to be the one screwed out of it more than the next person.

    • Philip: I acknowledge that the only way to alter the system is for everyone to stop cold-turkey on card use. That won’t happen because with or without rewards, there are too many consumers who are addicted to the use and/or convenience of plastic. Thus, I understand why people use rewards cards to recapture as much of the extra retail cost as possible. I just don’t like that our consumer behavior is being manipulated by banks, Visa, and MasterCard, causing a general increase in retail prices. Alas, it seems there is nothing to be done, except to allow merchants to add surcharges on card use, giving cash customers a break, or to encourage more use of cash discounts, where permitted by merchant agreements. Wouldn’t you pay cash for a 2-3% discount? I would.

      • Philip says:

        True, if the lobbying were taken away and they were able to have the direct savings by paying cash then I would gladly switch over to cash. Having a middle man siphon some off the top is never good, and they are obviously making money still even after giving back rewards, somehow they are not paying me more than they make from a transaction.

        Hopefully if that were to occur, they would find a way simpler than using cash or checks but bypass or seriously minimize the transaction costs to use money directly from a bank account. The convenience of not having to carry piles of cash around or making online purchases is pretty hard to get around.

  3. Evan says:

    Someone already mentioned tragedy of the commons….

    Another quick point is that there are benefits for the gov’t (beyond campaign donations). Specifically, it is a free record keeping system. How many cash businesses do you know that accurately track sales? This at least provides a paper trail.

    • lurker carl says:

      A credit card paper trail has convicted or exhonerated many folks accused of crimes, like the recently deposed mayor of Baltimore. Ms Dixon was caught stealing gift cards to be given to poor folks. If those cards had been purchased with cash, no trail would exist to lead prosecutors to her door. But they were purchased with a credit card and that was the proof needed for her conviction.

      Other folks have been proven innocent when they were on record charging stuff in a store when the crime they were accused of was being committed elsewhere.

  4. Bill says:

    Thank you for shedding light on this issue!

    Working on behalf of The Credit Card Con, I have been in touch with many small business owners who are paying an arm and a leg in interchange fees.

    Right now, interchange fees are the third highest expenditure for small business after salary and benefits.

    When these fees are absorbed or passed on by small business, the last thing they can do is afford to hire more employees. With 10%+ unemployment…that is a problem.

    Check out our website for more info!

  5. Interesting. However even if credit cards were abolished I doubt prices would go down. We’re too used to paying the current rates.

    In addition to any rewards, putting all purchases on my credit card gives me an added benefit. My mortgage is an offset mortgage, meaning the money in my normal bank account is offset against the mortgage balance. So, if my mortgage is $100k and I have $5k in my bank account, I only pay interest on $95k of my mortgage.

    So it makes sense for me to put all purchases on the credit card and pay it off once a month, so my bank account balance stays higher for longer (interest is calculated daily). At the moment with my modest account balances I’m saving about $150/month interest. I’d still save if I were taking cash out every day, but not as much.

    You may not have offset mortgages or lines of credit where you are, though, so YMMV. Also here, there’s generally a minimum purchase of say $10 to pay electronically, so I’m never buying little things like lunch on credit.

  6. MasterPo says:

    Most people just don’t realize the costs of a business accepting CC’s. Easpecially in the last 2-3 years transaction fees, statement fees, processing fees, chargeback fees etc. have SKY ROCKETED!!

    Who do you think pays for that?

    Not the merchant!

  7. I think that most big retailers will gladly pay those credit card interchange fees.

    First of all, there’s the additional time that taking cash places on a cashier, in both the cashier counting and the nice little old lady turning her purse inside out looking for a quarter. Less cash at the end of a employee’s shift is less time that someone has to spend counting it. Not to mention, now you don’t even need to sign your credit card, assuming it has one of those chips in it.

    Cash is easy to steal. I read that the average store expects shrink of 5%, with up to 80% of that being staff related. Imagine all the internal theft that would go away if a store only accepted debit/credit? Although at this point, stores accept both cash and credit cards, so it’s kind of a moot point.

    At the end of the day, giving people more options to pay for stuff is a good way to get them to buy more stuff. And I’m okay with paying for the added convenience of plastic.

    Oh, and why does anyone take Amex? The fees they charge are ridiculous.

    • Evan says:

      Don’t forget about the numerous studies that shows most people buy more when using a card vs cash

    • Philip says:

      “Imagine all the internal theft that would go away if a store only accepted debit/credit? Although at this point, stores accept both cash and credit cards, so it’s kind of a moot point.”

      If it were not profitable then companies like southwest airlines would not switch their in flight beverage service to credit ONLY NO CASH accepted! Obviously it is not hurting them to much not having to deal with cash, and going around trying to find change from everyone.

  8. Diasdiem says:

    While card issuers don’t allow merchants to charge surcharges for credit card users, they do allow them to give discounts to people who pay in cash. Spec’s Liquor here in Texas gives a 5% discount for cash, which is really probably just the regular price and credit cards get charged that much more. It’s all semantics, really, but if more merchants did that, I’m sure more people would use cash.

    • Philip says:

      Good point with specs, I go there and use my debit card to purchase all the time so I get the 5% “discount”. Almost the only time I don’t use my credit card.

  9. kitty says:

    TML — you always, always ignore the fact that merchants pay interchange fees on debit cards as well. I brought it up in the past, multiple times in fact, but you deliberately ignored my comment and keep talking about only credit cards again and again and again while probably using your own debit card (as credit, right?). Did you try entering the first 6 digits of your debit card associated with rewards checking that you use? You keep writing about credit card cost and totally ignore your own debit card. This is hypocritical, don’t you think? or do you always use pin transactions on your debit card?

    I used website you mentioned, and it told me that my rewards card carries about .7% higher fee than a regular credit card. But what I found more interesting is that when I entered the first 6 digit of a Visa branded DEBIT card as well as first 6 digits of master card-branded (“Benny”) debit card associated with FSA account your referenced website thought this was a credit card and not a debit card and that it carries the same fee as most non-reward debit cards. Interestingly, the difference between cost on their specific examples for my debit cards and my credit card was minor. This tells me, that when you use debit cards but press “Credit” on checkout, the merchant would pay the same as for regular credit card.

    TML – do me a favor. Go to this website you linked to and enter the first 6 digits of the debit card associated with your high yield checking account.

  10. MasterPo says:

    Fees are mostly a percentage of the sale. You buy more, the merchant pays more. It all cuts into the margin.

    You don’t loose money on each sale but make up for it in bulk!

    Very very big merchants *might* be able to negotiate better fee and rate deals but the average merchant can’t. :-(

  11. Ty Hardison says:

    I can only hope that this lesson of embedded cost translates to the understanding that taxes and tax compliance costs imposed on business is transferred to consumers in the form of higher prices. Not only do we pay income tax, fica, sales tax, etc. we are also burdened with hidden taxes. So Interchange is 2% and you are mad. The embedded tax consequences represent approx. 22% inflated cost on everything you buy. Where is the revolt?

  12. cjbr549 says:

    I think one thing that is overlooked here is the cost to the merchant of accepting cash. Depending on the volume of the business there may have to be dedicated staff to count and sort the cash, as well as security. I know for a fact that nearly 15 years ago Wal-Mart supercenters took in over 100k per day in cash during the holiday season. That’s an awfully juicy target. All the Las Vegas casinos have been going away from cash in their machines (they accept cash, but give back tickets, which have to be cashed in at the cashiers. I’m sure casinos have onerous security expenditures as a percentage of their business. So there is a cost too using the plastic, but without knowing the cost savings from not having the cash to deal with, it’s difficult to determine the actual costs.

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