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Credit Card Costs

August 30, 2007
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A few thoughts on credit card applications and their costs

Visa has recently come up with a commercial to promote its credit cards. Essentially, the ad shows a smoothly operated business with a constantly moving line of people who use credit cards for payment. However, the neat process stops as soon as someone from the line takes out cash.

The idea behind this ad is simple - Visa is trying to market its products as a fast and convenient mean of payment. However, this convenience comes at a price. And if you thought that it's the merchants who end up paying more due to processing and transaction costs, then you were only 50% right.

However, it's not just the customers that are being targeted by this commercial. Credit card issuers are also trying to send a message highlighting that all sorts of businesses would prefer plastic over paper money. This is not quite true and mostly depends on the size of the business.

We can see how a huge business may end up paying more for carrying out operations with cash transactions rather than debit or credit cards. But on the other hand, small and medium size companies have no trouble dealing with cash or checks.

In fact, small companies lose on payments made with plastic. They are obliged to pay a commission on every transaction together with the processing, batch and statement fees. And when it comes to pricing the goods, it's the customers that get hurt the most.

First, there is often a minimum amount required for purchases made with debit or credit cards. This makes it inconvenient for people who are willing to purchase small items. Next, certain retailers are charging different prices depending on the method of payment for the same item.

The worst thing is that a lot of companies end up boosting prices to keep up with the increased costs. Therefore, when it comes to choosing between credit cards and other means of payment think twice. You might be paying a little more than the interest on your card.

Some experts argue that the processing cost incorporates costs of providing convenience of credit cards to the public. This does sound fair enough for us. However, credit card companies should not market their products as being superior or equal to cash.

Staying on the subject of credit card commercials, there is another thing to be noted. Think of all the rewards that are being aggressively marketed. There are tons of commercials promoting credit card applications with attractive reward programs. But what they are not telling you is where they get the funds to support such programs.

Well, it turns out that it's the cardholders themselves who get to pay for all sorts of bonuses that their card has to offer. To financially support reward programs, credit card companies increase transaction fees and rates for merchants, who in their turns have to increase prices of the goods and services they are selling to stay in the business.

Now that you know a little more on credit cards, we hope you can contribute to the ongoing fight against unfair practices by paying cash or writing a check here and there. We do not discourage credit card usage - they do prove to be useful in a lot of cases. However, you may find paper money to be more effective cost-wise in the long run.

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