What Is Bank Fraud? How to Recognize It, Avoid It and Report It
How to Open a Bank Account for a Minor
How to Balance a Checkbook
Retirement Savings: How Much Should I Save Each Month?The Hidden Costs of Reward Cards
Post a Comment
POSTED
ON BY Ken Tumin
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:
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.
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.