You still pay credit card fees even if you use cash
You might think that there is no cost to pay for everything in cash. There are no annual fees, no finance charges, no risk of missing a payment, and no chance of paying interest – all of the ongoing charges associated with credit cards.
But paying with cash doesn’t allow you to escape the impact of card fees on the prices you pay where you shop, and those costs could be much higher than you think.
A 2010 study by Federal Reserve Bank of Boston found that the average household using cash pays $ 149 per year in additional card costs. This number stems from the fact that the widespread use of credit cards is driving up prices for everyone, but as we will see below, only credit card users benefit in the form of rewards.
To understand how paying with cash can cost you money, you must first understand how credit card companies make money. Then you can make an informed decision on how best to keep more of that money for yourself.
The hidden cost of retail
Every time someone purchases something with a credit or debit card, the merchant pays a fee to process the payment. These fees, called interchange fees, can vary depending on the type of card (credit vs. debit), the payment network (American Express vs. Mastercard) and the type of merchant (grocery store vs. restaurant).
Somehow traders need to build interchange fees into their trades. It is legal across the country to offer a discount to customers who pay in cash. In some states, merchants are allowed to charge additional fees if you use a credit or debit card, but many credit card companies do not have surcharge rules. In addition, these efforts can be a headache to implement, both from an accounting point of view and at the cash desk.
This is why most retailers factor their average interchange fee into their prices. So if the merchant pays an average of 2% interchange commission and half of their customers use cards to pay, they will increase their prices by around 1% on average.
This means that unless you buy exclusively from cash merchants or merchants that offer cash back, you are paying more for the items than if credit cards weren’t there. This applies to both cash users and credit card users. Prices are higher at most retailers because of credit cards.
Banks love interchange fees
Interchange fees make a lot of money for the credit card companies. Last year, more than half of American Express’s revenue – $ 18.7 billion – came from “discount revenue,” its term for interchange fees.
Interchange fees were more than double the revenue the company generated from interest charges. The fees associated with their credit cards – annual fees, overseas transaction fees, late payment fees, etc. – contributed only $ 2.9 billion to American Express sales.
Interchange fees generate a lot of money for the banks that collect them. That’s why they encourage cardholders to spend money on rewards. Rewards take the form of cash back or travel points.
Credit card companies always make good profits after considering the rewards they offer. Last year, American Express offered its cardholders $ 6.8 billion in rewards. This is paltry compared to the $ 18.7 billion he took out of interchange fees.
Many credit cards offer sign up bonus new cardholders if they spend a certain amount within a few months of receiving the card. Larger sign-up bonuses usually require more spending, so the interchange fee can offset a larger portion of the bonus.
Rewards allow credit card users to recoup some of the extra money billed to them through interchange fees.
How to take advantage of credit card companies
The easiest way to start getting some of the interchange fee money back is to use a fixed percentage credit card. There are several options that can earn you 2% cash back on every purchase.
A 2007 study by the Federal Reserve Bank of Boston found that the average credit card user spends $ 14,280 per year, or about $ 16,830 in today’s dollars. At 2% off, that’s $ 336.60 back in your bank account each year, and that should more than offset the costs hidden in retail prices through interchange fees.
If you find yourself spending most of your money in one category of merchants, like grocery stores, a tiered cash back card that offers a little extra for your favorite shopping category may be right for you. Review The Motley Fool’s Picks For best cash back credit cards to find the card that best suits your consumption habits.
Consumers can earn even more rewards if they choose to use travel points. Several issuers offer their own brand of flexible reward points that can be redeemed through travel portals or as statement credit against qualifying travel purchases.
Issuers are also partnering with hotels and airlines to offer credit cards that earn points through the partner rewards program. While it is difficult to place an exact dollar value on some of these points, consumers should be able to redeem most of them for at least $ 0.01 each and sometimes a lot more.
Take a look at The Motley Fool’s picks for best travel credit cards to find the one that’s right for you.
There are also several additional benefits of using credit cards instead of cash. You cannot get benefits like purchase protection or free extended warranty with cash.
When credit cards cost you more than cash
It’s important to remember that credit cards come with many pitfalls, which is why many people prefer to stick with cash, even if it costs them potential earnings.
If you’re likely to overdo your credit limit and spend more than you would on cash, you’re automatically going to cost you more than if you stick to old-fashioned paper tickets. Not only will you be spending more, but you could also end up paying interest because you spent more than you could afford to pay at the end of the month.
On top of that, you need to make sure that you are using the credit card correctly, the way it was intended, or you might be faced with a number of fees: overseas transaction fees, upfront fees. funds and late payment fees, to name a few. Banks will try to find a way to charge you a fee, so be sure to read the fine print.
The annual fee could also make credit cards less attractive. If you don’t earn enough rewards to make up for the annual fee, that’s a losing proposition. Fortunately, there are a lot of good ones credit card with no annual fee option.
If you manage your credit cards wisely and making the most of the rewards, you might find yourself part of the household receiving benefits from the credit card companies instead of paying them at the cashier using only cash.
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