Credit Cards are not Free

They may be free for the user, but merchants pay a high price for consumer convenience.

Sure, we love the rewards that often come with a credit card, but these rewards are really a bribe to keep the consumer hooked on using credit, and the merchant pays the price. It's pretty clever of the banks to bribe you to use their service using the merchant's money.

Credit card fees range between 1.5% and 3.5% plus $0.49, with most being around 3%. These fees are generally paid by the merchant, though some business either offer a discount for cash or a surcharge for using a credit card, thus passing this cost onto the consumer.

Think about how many purchases are made using a credit card, and then realize that the credit companies are skimming off around 3% of this amount. That's a lot of money! And if the consumer does not pay it off every month, they can charge outrageous interests rates on the other side of this transaction too. What a lucrative business model.

Debit cards on the other hand take the money directly out of the consumers account, and the fees are tightly regulated. By law in the US, large institutions are limited to a 0.05% fee, plus $0.21 per transaction. Smaller institutions like credit unions (Less then 10B) can charge up to 0.8%.

The chart below compares the credit card fees for Paypal (2.99%) vs a large institution's debit card:

Let us consider a purchase of 1000 for say a new appliance. If the retailer has a 10% gross margin, then their profit from someone paying cash would be $100, but only $69.61 for someone paying by credit card. Do you want to divert that $30 from the merchant to the banking system just to get a 3 week delay in payment which might earn you an extra $0.05 in interest in your checking account?

The big down-side to using a debit card is losing the reward points that many credit cards offer. I have decided that for me, I'd rather see the merchant get than money than accept the bribe to keep money flowing into the banks. How we spend our money becomes a vote for the kind of world we want to live in.