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The True Cost of Credit Card Rewards

What is the true cost of credit card transactions, for merchants and cardholders? It may be more than we realize.

Merchants pay approximately 1-3% of every credit card transaction in order to accept this form of payment. Some, particularly small retailers, pay more. Higher fees results in higher prices, subsequently affecting both credit card holders and customers who pay cash. This poses the question: would we all be better off if we all stopped using credit cards to make purchases?

There seem to be downsides and upsides to this scenario. It's difficult to determine exactly what fees a merchant will pay for a credit card transaction, as each type of card is different. Reward-earning cards, for example, are likely to cost a merchant more than standard credit cards. These fees can result in higher prices, but the ability to make purchases with credit cards may increase business for these merchants. Some consumers spend more money because they are able to put it on a credit card or may only make a purchase because they have a card (if they do not have the money in the bank to cover it). Though credit cards also present fees to the cardholder (an average of $427 per year for per American household*), there are also benefits to having a card, such as the ability to dispute a transaction or the convenience of not having to visit the ATM on a regular basis to take out cash.

To truly put this concept to the test, all Americans would need to stop using credit cards. Even if this were possible, which is highly doubtful, it may not have the desired effect. Though merchants may lower prices because they would not have to pay high credit card transaction fees, the banks may try to make up for their lost income by charging higher fees. The only way for the consumer to truly win would be for all merchants to offer a discount for cash purchases.

Retailers are prohibited by law from charging fees to customers for credit card transactions but are allowed to offer discounts to those who use cash. Though this scenario offers cash-paying customers the ability to save money, it may present various problems for retailers. In some states, retailers that offer cash discounts are required to display both the cash and credit card price. Retailers are also not guaranteed that they would see more business by offering a discount for using cash.

Perhaps there is currently no "catch-all" solution to address the high fees that both retailers and cardholders pay for reward-earning credit cards. For the time being, individual consumers can choose to limit their credit card purchases and retailers can choose to offer cash discounts. Though this may not have a considerable affect on the economy, it may be a step in the right direction.

If you are one of many Americans dealing with overwhelming credit card debt or other financial difficulties, you may be able to seek relief with the help of a Long Island bankruptcy lawyer from Jacoby & Jacoby.  Contact a bankruptcy and debt relief attorney at our firm today.

*According to the National Retail Federation from 2008.

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