Handling Finances

I use a credit card for just about everything I purchase. I get my gas without walking inside the gas station, I tip waitors without having just the right bills and ordering online is easier than shopping in person. I don’t pay the credit card companies a cent — I pay off the full balance on time each month and to top it all off, I even get over 1% cash back on everything I purchase! The credit card company must hate me since they give me money and don’t make a cent right?

Not quite. You see, the credit card companies (and the banks that issue the cards) collect an average of 2% of every transaction in interchange fees. Because the vendors I purchase from need to make just as much money from credit card transactions as from cash purchases, that means that they must have slightly increased prices to gain back the money they’re sending to the credit card companies.

Don’t get me wrong here, as I said before, I use credit cards for just about everything. I enjoy the convenience of not having to carry around as much cash and the ability to download my transactions directly into Quicken gives me an amazing budgeting tool. At the same time, I think it’s important that we don’t fool ourselves into thinking that we’re actually getting that 1% cash back for free. As only a third of Americans are aware of interchange fees (according to a Jan 2007 Harris poll) we clearly aren’t very well informed about where the money to fund our rewards comes from!

I don’t particularly mind getting a virtual refund for my purchases through my cash back rewards program, but I would much prefer if the credit card companies would just make it a whole lot simpler and stop charging such high interchange fees. That’s been a big deal in many other countries in Europe and recently, Australians passed a law capping interchange fees at 0.5% of purchases. Of course, rewards cards disappeared overnight in Australia, but I can’t help but think that they are much better off.

It’s important to note that businesses aren’t just being charged extra for transactions for nothing in return. In particular, allowing people to purchase goods they can’t afford is a great asset to any store. If it weren’t for this strong incentive, few companies would be interested in processing credit card transactions at all!

Of course, there is an easy way to avoid these rather large interchange fees. Debit card transactions (called online transactions vs. the offline credit card transactions) are much easier and faster to process so the fee is only a few pennies — generally around 10 cents. Be careful though — debit cards can be processed just like credit cards with the higher interchange fee. If you’re signing for the transaction, your debit card is being processed as a credit card. Be sure to punch in your pin number and you’ll be processing a real debit transaction.

One more warning: the banks that issue debit cards know they get a whole lot more money from offline transactions — both because of the higher interchange fee and because they get to keep the money and earn interest for a couple more days. They often offer their own rewards that are accumulated only when you use your debit card offline like a credit card.

For now, I continue to use my credit card for most purchases. To be quite honest the marketing of 1% cash back works very well with me and I like getting some money back on everyday purchases. I also like the idea that people who pay with cash are paying the same price as me even though I’m getting a cut of the interchange fees back through rewards (is that greedy?) The bottom line is that using credit cards isn’t free and even if you don’t pay interest or late fees, the credit card companies get their money.

This entry was posted on Friday, January 18th, 2008 at 6:30 am and is filed under Credit Cards. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.