Are You Financing Your Favorite Store?

 

“Credit card transactions cost American merchants six times as much as cash transactions. Why, then, do consumers pay the same price for purchases, regardless of the means of payment?”

 

Two weeks ago, I wrote a post about my summer vacation. In that post, I mentioned that I was partially financing my next trip to Disney with my rewards credit card. My method is simple; I use my credit card for every single purchase and then pay it off completely at the end of the month. This strategy enables me to:

–          Save on transaction fees (since purchases are done without fees through my credit card)

–          Gather a lot of points that are turned into cash to finance my vacation

–          Keep a good credit rating (since I use my CC and pay it in full each month)

–          Pay no high interest (the key is really to pay it off every month!)

 

Jessi, a regular reader, mentioned that she does the same. She also said that she used to feel that non-cc users were subsidizing her. Why is that?

 credit card issuers

Are You Financing Your Favorite Store Without Knowing It?

 

The answer is yes if you are paying cash or with your debit card. Huh? Say WHAT??? Yup! To understand the concept, here’s a little graph that says it all:

 

Processing Fees

 

As you can see, there is a 2% fee factored into all transactions. Stores have to do it this way… why? Because they pay that 2% fee on all credit card transactions! The problem is that according to law, merchants are not allowed to charge a different price for a good depending on how the client pays. Therefore, someone who pays with his credit card will pay the same price as someone who pays cash. The difference is that the merchant is making an additional 2% profit on the cash transaction. In other words; if you don’t pay with your credit card; you are subsidizing other customers! This *small* transaction fee represent over $50,000,000,000/year charged to everyone who shops. Do you think that Visa, MasterCard and Amex are not laughing right now?

 

Credit Card Companies Are Smart Cookies – Processing Fees Explained

 

When you buy something, there are 2 types of costs that you don’t see:

–          The Processing Fee (a cut paid to the transaction processor (either debit or credit card)

–          The interchange Fee (another cut paid to credit card makers)

 

Where debit card processors earn a small portion of the 2% fee, the biggest part of the pie goes to interchange fees charged by the credit card supplier. While the credit card business can be quite risky (you never know when people will stop paying their 19.99% interest card!), the processing business provide a steady income to those *poor* companies which have to financially support their customers for at least 30 days.

 

While the cost is usually around 2%, there are cases where the processing fees + the interchange fees go up to… 4%! The thing is that it’s a “hidden” cost and you can’t do much about it.

 

What Can You Do To Avoid Processing Fees?

 

If you are tired of being the Credit Card Makers’ cash cow, I have a bad news for you; there is not much you can do! After some research, here’s what I found:

 

–          The best way to avoid processing fees is to actually pay with a reward credit card (cash or points). At least, you are getting cash back and are not subsidizing anybody!

–          You can ask merchant for a discount on big purchases when you pay cash.

–          Some merchants don’t accept credit cards because of the processing fees. Chances are that they are cheaper than others (not proven).

–          Canadian Tire (Canada) offers Canadian Tire Money if you pay cash or with a debit card but not with your credit card.

 

Yeah, I know, the list is not super long! Do you have any other tricks to save on processing fees? Did you even know about them?

 

Note: if you are a merchant, there is a site that enables you to save on the processing fees. You can take a look at True Cost of Credit.

 

Information taken from:

Priceless? The Competitive Costs of Credit Card Merchant Restraints by Adam J. Levitin

Consumerist.com

LA Times

 

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About the Author

Financial professional and online entrepreneur, I'm best known as The Financial Blogger. I want to make money because I like enjoying life the way it should be; with a lot of great food and wine! I also love to spend time with my lovely wife and 3 kids!