Credit card companies around the world are looking for your cash – they want you to carry their card. And they’re going to provide you with as many novel ways to get you to carry that card that they can think of.
The companies are making their money in two ways. The most obvious way is by charging consumers high interest rates on outstanding balances. But there’s a second, less obvious way. Every time you swipe your card, the credit card companies charge the retailer 2%-4% of your purchase. This is a sizable expense for retailers. Consider the sales at someplace like Walmart – 4% of their annual sales is going to be a boatload of cash. And that 4% is being made up somewhere – in higher prices. Retailers simply can’t eat or ignore that high or a cut of their net income.
From the consumer perspective, there’s two types of credit card. There’s lower interest rate credit cards that provide few additional benefits. And then there’s the big-benefit credit cards where you get various bonuses and incentives. These credit cards typically come with two hidden costs. First, interest is normally substantially higher (as much as 5-10% higher) than the first type of credit cards. Secondly, these credit cards can cost the retailer in terms of paying a higher percentage to process it. Worse, retailers are prevented from offering discounts on cash prices in order to motivate consumers to not pay using credit cards.
The retail and competition industry in Canada has taken note of this and are investigating. See story at http://www.cbc.ca/news/business/story/2012/05/08/credit-card-competition.html
Here’s some examples of the wide variety of the credit cards offers you can get in Canada: http://www.hsbc.ca/1/2/en/personal/credit-cards/rewards?WT.ac=HBCA_113108_16MASTERe03857H .
Should you care? Should you take the credit card with the best offer and reap the benefits and let the retailers eat the front line costs? Or should we care that retailers are paying these high fees and likely returning higher costs to us? It’s clearly a personal choice, and little different than voting in a national election – individually our voice of dissent is lost and only collectively can we make any changes in the industry.