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The Hidden Costs of Reward Cards


This NYT article, The Damage of Card Rewards has an interesting discussion of the hidden costs of using reward credit cards. It's not the direct cost that consumers pay, but the cost paid by the merchants. Here's how the article describes the issue:
For several years, I’ve wondered whether my aggressive pursuit of credit card rewards made me a selfish consumer.

After all, the 1 to 3 percent or more of every transaction that merchants pay to accept the cards is a significant cost, and the small local retailers that make neighborhoods vibrant often pay a higher percentage.

Another issue discussed was how some retailers give discounts to those who buy with cash. According to the article, credit card companies "allow cash discounts but prohibit surcharges for card use." This is how stores like Spec's get away with giving a 5% discount for cash or PIN-based debit cards. The article gives the reasons why most stores don't offer this.

The article pointed to the site The True Cost of Credit which allows you to find out how much it costs merchants when you use your credit card. I gave it a try with some of my cards. I would suspect the results aren't 100% accurate, but they seem to give you an idea of the costs. The interesting thing to note is the higher percentage costs for small purchases. For example, it showed a cost of $0.42 to a convenience store for me buying a $1.50 pack of gum with my Visa credit card. That's 27.8% of the purchase. $0.40 of the cost is the per-item fee. The other $0.02 comes from a fee of 1.556% of the purchase price.

This issue of the high costs for small purchases is more important for reward checking account customers who have a reason to make multiple small purchases. The article focuses on credit cards, but debit cards when used without a PIN (credit or signature option) have similar interchange fees as pure credit cards. I could see gas station owners getting mad at someone who's constantly making many small purchases at the gas pump. It's something to keep in mind when you're trying to meet your monthly reward checking requirements. If PIN-based debit card purchases can be used to meet your monthly reward checking requirements, this may be better to use especially for small purchases. Last week I reviewed an article that discussed how the credit card companies have profited from signature-based debit card purchases.

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Anonymous   |     |   Comment #1
Small business owners (I am not one) have a rough enough time as it is. I think it's very wrong to stick them with minuscule purchases. My understanding is that credit card agreements do not allow merchants to require a minimum purchase amount for use of the card, yet many violate this provision. Why punish those who go by the rules? I never use my card for less than a %5 purchase.
Anonymous   |     |   Comment #2
The credit card bill currently in Congress will put end to RCAs and the interest rate paid out to these accounts. Enjoy it for a few more months.
Anonymous   |     |   Comment #3
Just FYI, re "credit card companies allow cash discounts but prohibit surcharges for card use."

Actually, it is federal law that bars surcharges for using a credit card. Some years back, gas stations decided that a cash discount did not quality as a surcharge for use of a credit card, and thus was started cash discounts.
marc   |     |   Comment #4
I agree that I try to avoid hitting small merchants / small purchases with my reward checking debits, unless I'm desperate, for the reasons BG speaks of. One thing to keep in mind is the different fees paid by different types of merchants. CC companies got Supermarkets to accept CCs years ago by giving them lower fees. So don't feel bad for sticking it to Safeway. I'm not sure this is the case still, but I think so. At least, the Visa interchange reimbursement rates are significantly lower for supermarkets according to this: http://usa.visa.com/download/merchants/april-2009-visa-usa-interchange-rate-sheet.pdf
Anonymous   |     |   Comment #5
In addition, PIN-based debit card transactions have much higher risk than non-PIN based transactions.
Anonymous   |     |   Comment #6
The real gist of this piece is that you're losing out if you're not getting rewards for your purchases. We can't convince everyone to stop using cards, so why subsidize those who don't?

For those of you who belly-ache at the fees charged.... This is the cost of doing business. Credit card users generally buy more than those who pay with cash; that's an advantage. If there's something really great about your business, people will pay cash.

Each business owner needs to weigh the costs and benefits of accepting credit cards -- rather than complaining to Congress.
Rick@Rickety   |     |   Comment #7
What I say is, tell me the rules and I'll play, unless it is morally wrong.

Many people can't be bothered with rewards checking so I benefit because I take the time and trouble. Sometimes I have a $1.05 purchase and this week a $529 purchase on my RCA. Then I had to field a call checking up on my "large" purchase.

Charge over a dollar and the bank gets nervous. That can't be Rick, he always charges a dollar!

If a merchant won't take my card I will go elsewhere. Simple.
Deana   |     |   Comment #8
I feel sorry for the small business owner, but I love my rewards card. I plan to keep using it.
Anonymous   |     |   Comment #9
It'd be interesting if the major grocery chains issue their own charge/credit cards like department stores. Costco has an Amex card. Some Gas stations do too. Is that mutually beneficial?
mk   |     |   Comment #10
The cafeteria ladies at work prefer credit/debit cards over cash. I don't know if a dollar coffee earns the cafeteria 40 cents less, but nobody there seems to be complaining.

So, I plan to continue using my rewards checking account card there to make small purchases and get both, the transaction count and convenience of using a card.
Anonymous   |     |   Comment #11
How do discount gas stations (i.e. Arco) get away with not allowing Credit purchases at all and charging extra when using your Debit card?

According to the article they are breaking the rules. Arco is a pretty big company, so I'm sure Visa is aware of their practice.
kow626   |     |   Comment #13
a few things i've found...

those gas stations that charge less for gas if you use cash will give you that same price if you use your debit card.

i fulfill my monthly purchase requirements with my reward checking debit card (processed as debit) at the gas pump all in one swoop. haven't heard a peep from my bank and that may be cuz i use some of their other services so they give me a pass.

everyone blames credit card companies for problems but the real prob is 1: people have no clue how to handle their money. 2: merchants need to take responsibility for a lot of the fraud going on.

it's a no brainer. know the terms and conditions of your card. you use the card, you agree to them. point blank. you don't like the terms, get a new card. you use your card, you owe money, pay it back! you don't, suffer the consequences. pretty simple.

and merchants need to start checking id's on ALL in person credit transactions, i don't care how big or small the purchase is. that'd cut down on half of all the fraud going on out there which i bet would save us all money.
Anonymous   |     |   Comment #15
When I dined out and if the bill comes to $100.00 and I paid cash, that is $100.00 and I am not getting anything back. But if I use my credit card I will earn some points that I can redeem later on.
Anonymous   |     |   Comment #16
 In Hong kong  my HSBC Mastercard  reward points regularly expire if I don't use them . Not worth much anyway. I dream of getting a better credit card, perhaps with airmiles. But then I must say that HSBC Hong Kong do back you up against fraudulent transactions on your card, means to say the service is good, so you have to choose. Yes it is your choice.
Anonymous   |     |   Comment #17
I'm wondering why cc companies don't just charge a flat percentage of each transaction so that smaller purchases are not "penalized". What's up with that?
Mariam   |     |   Comment #18
How does it work other countrywise? pls explain briefly.
creditcardassist   |     |   Comment #20
We know that reward credit card provide many reward points But rightly said that it has some hidden costs also. Take care of annual fees, changes to your credit score, interect rate and cost of vacations etc.
Anonymous   |     |   Comment #21
The fees merchants have to pay banks for the use of their credit/debit card machines and the % they charge for each transaction are all added to the cost of the product we are buying.  For instance in Calif. ARCO Companies charge you .45cnts to use your debit card to buy gas.  Most other fees are hidden in the price we pay.

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