Using Your Credit Card Costs You!

As a nation we’ve become addicted to convenience, and few things are more convenient than credit cards these days.  For purchases below $50, you don’t even have to bother with signing a receipt much of the time.  You just swipe and go.  But as the old saying goes, you can’t get something for nothing.

The True Cost Of Credit

Until recently, the cost of convenience had been cleverly hidden by the credit card companies.  People wrote price increases off as inflation, and much of it was.  But just how much of it was due to more and more of the economy’s transactions being funneled through the credit card system?

Someone recently pointed me to one of my new favorite websites, TrueCostOfCredit.com.  You can put in the first 6 digits of your credit card number, which contains information on who issued the card (see this Wikipedia article), and it will give you information on just how much of each transaction your credit card issuer and clearinghouse (i.e. MasterCard, Visa, Discover, etc) skims off the top for themselves.  The results are mind-blowing.

I was a bit weary of providing my credit card information, but fortunately the site includes a list of generic example cards.  Here are the results for the average MasterCard Rewards Card like the one you probably have in your wallet.  Credit card charges typically come in two forms:  a fixed per-transaction fee, in this example $0.25 for a pack of gum, and an additional percentage of the total value of the transaction on top of the fee.  The fixed per-transaction fee is the minimum fee for any transaction, regardless of size.  I’m not sure how exactly it’s set and looks like it varies by the class of product, but it’s always there.

The site then gives concrete examples of how much the credit card company and retailer get out of sample purchases:

• A $1.50 Pack Of Gum: Transaction Fee:  $0.28, Percentage Of Total:  18.7%
• A $30 Tank Of Gas: Transaction Fee:  $0.71, Percentage Of Total:  2.4%
• An $800 Flat-Screen TV: Transaction Fee:  $20.70, Percentage Of Total:  2.6%

There you have it;  the cost of using credit ranges between 2.4-18.7% of the purchase price of an item.  Obviously, the fixed per-transaction fee makes the fee much larger as a percentage of the total purchase price for inexpensive items, such as a pack of gum, than more expensive items, like a flat-screen tv.  That said, it seems a bit unfair that the credit card companies would make $20.70 off every flat-screen tv and still have the gaul to charge 18% interest rates (although those rates are more for the issuing bank’s benefit than the card processor’s).

What You Can Do To Help

These fees take a huge toll on many small business owners, especially those selling primarily low-cost items.  Many small businesses are forced to give up 10% or more of their revenue for the privilege of accepting credit cards as payment.  Here are some things you can do to help the little guy:

• Pay Cash For Inexpensive Items – By paying cash for items costing less than $10, you could easily double the business’s profit margin.  You may not care about Wal-Mart, but what about the nice convenience store owner down the street who gives jobs to all the neighborhood teenagers?  You want to support him, don’t you?
• Buy Many Items At Once – By making one large transaction rather than many small transactions, you give the business owner a bit of a break on those per-transaction fees, since there are fewer overall transactions.