MPmomof3Credit Cards Drive Up Product Costs
September 23rd 2010 01:21
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The Problem with Plastic
Credit card companies hire ingenious marketers. They promise everything from "low introductory rates" to "cash back" to "airline miles" and much more. The goal is to create a perceived value in the mind of the consumer so that consumer will apply for and frequently use the card. Have you ever wondered, however, why the credit card companies work so hard for your business? The answer, in short, is that there is something in it for them.
Forget, for a moment, that many credit cards have annual fees and interest charges paid by the consumers who use the cards. That is only one source of income for the credit card companies. Credit card issuers also charge fees to retailers who use credit card terminals to process card transactions.
According to a July 28, 2010 National Retail Federation article (click here for source), "swipe fees - officially known as interchange fees - are a percentage of the transaction charged by card company banks each time a card is swiped to pay for a purchase. The fees average between 1 and 2 percent for debit cards and 2 percent or more for credit cards." This may not seem very alarming, but when you look at it in dollars, this information gains a whole new perspective. According to the National Retail Federation's Article, "Overall swipe fees charged to retailers and other business by Visa and MasterCard banks totaled $48 billion in 2008, with debit swipe fees accounting for about $20 billion of the total." The article also illustrates the fact that consumer use of credit cards actually drives the cost of retail goods up due to the credit card fees merchants must add to the cost of the goods for all their customers, weather they pay with plastic or not.
Higher prices aside, what does this mean for the American Economy in general? An August 31, 2010 Federal Reserve Board article attempts to answer that question (click here for source). In the article, authors Scott Schuh, Oz Shy, and Joanna Stavins hypothesize that credit card reward incentives which are issued based upon spending are provided to consumers with higher incomes. This, in theory, causes higher income households to use credit cards more and consequently drive up the cost of goods, making those people with lower incomes pay more.
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