Aug. 22, 2005 - The Cost of Credit Cards

Hopefully I do not need to explain the problem with running up debts on credit cards.  It can ruin a family quickly.  Just ask Lender's Slave.

I know, I know -- you don't fall into that category.  Instead, you use a credit card just for convenience or to get some great "free" benefit.  You pay off the balance every month.  No debt for you!

That's good in one sense, but have you ever considered that the credit card companies have got you just where they want you?

Here's how.

1.  Credit card companies levy a 2% to 3% charge on every single transaction they process.  Do you think retailers eat this charge out of the goodness of their hearts?  Nope. They pass the cost right along to us in the form of higher prices.  Cha-ching!  Credit card companies win.

 

2.  Retailers don't put up with this system without getting any benefits either.  Credit card transactions are more convenient for them and their customers.  But that convenience has a price.  Studies show that consumers who regularly use credit cards tend to spend at least 5% more than they would have otherwise spent with cash.  Cha-ching!  Retailers win.

To underscore this last point, along comes the following report in the September issue of Kiplinger's Personal Finance.  New technology called radio-frequency identification (RFID) allows a person simply to "wave" a credit card in front of a checkout terminal -- no swiping or signing necessary.

Pretty neat.  Much safer.  Real convenient.

Kiplinger's reports:

"Retailers love it because it speeds customers through the line, and shoppers spend 20% more than they would otherwise."

Ouch! That's a steep cost for safety and convenience.

To paraphrase a well-known investor's advice, "In every financial transaction there is a loser.  If you can't readily identify that party, then you are it."

With credit cards, we know the credit card companies win (just look at their profits) and retailers win with increased business.  Where does that leave consumers?  Well, let's just say we've identified the loser in these transactions. 

Still think you're getting a deal on that little cash rebate or with those extra airline miles your credit card gives you?  Think again.