What's In Your Wallet?

From gasoline to groceries, Americans are being trained to charge incidental living expenses to their credit cards.  In years past those of us who would have used cash, check or ATM are instead pulling out the Visa Card.

Granted, some people, including yours truly, have used plastic for living expenses due to financial hardship, but more and more Americans are using credit cards as a convenience or to earn "rewards" in the form of airline miles, cash back or other various perks being offered by the credit card industry.  Following the old saw that nothing in life is free and there is no free lunch (or airline miles) we should be asking ourselves, where do these perks come from?

Discount Fees

Discount fees are what credit card companies charge merchants for a transaction.  In other words, when you pay for that tank of gas ($45) with a credit card, the merchant must pay the credit card company between 2 and 3 percent of the transaction (.90-1.35).  However, merchants are not allowed to advertise these discount fees nor raise the rates on credit card customers in order to offset the discount fee.  

Visa and MasterCard prohibit surcharges, and American Express discourages them. Amex does prohibit "discrimination" against the Amex card, however, so if a merchant accepts Visa and MasterCard (and cannot impose a surcharge under those companies' rules), the merchant may not discriminate against Amex by imposing a surcharge.
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A savvy merchant will price most merchandise higher in order to ensure profitability, which results in cash customers paying more for items than they should, and credit card customers less.  "So, there is a free lunch and those silly greenback paying goons are footing the bill for my hoagie," you might be thinking. Not really, both customers are paying more and the reward program is only a partial return of discount fees to reward credit card usage and encourage it in areas where historically consumers have used cash.  As this behavior becomes ingrained in the public the credit card companies won't need to offer fancy rewards to train us to this new behavior.

 However, the more consumers resort to plastic, the more vendors will need to incrementally raise costs in order to cover these discount fees, raising the rates of most goods and services in the process.

So, even if we charge things for the free miles and pay off our credit card every month, we still aren't getting that free lunch we were hoping for.

News Times Live

According to a national Gallup poll, only 42 percent of Americans surveyed pay off their credit card balance every month. Eleven percent pay only the minimum due.
The combination of charging short-term items on cards and not paying off balances can magnify debt. A $40 gasoline purchase can quickly spiral to $100 with interest

Rock River Times

the average household has about $9,000 worth of credit card debt.