Monday, May 5, 2008

The Credit Card Fees You Didn’t Know About

Do you know that you are paying for the convenience of using a credit card, even if you don’t make your purchases in plastic? Or, do you realize that using a rewards credit card to make a purchase actually cuts into the profits of the merchant you are purchasing from? Most consumer do not know that using a credit card actually costs merchants each time that card is swiped. In fact, credit card use has been a very touch subjects for many merchants and several of them are banding together to try to bring about a change.

Understanding Interchange Fees

When a place of business decides to provide its customers with the option to pay with a credit card, that business has to set up an account with a credit card processing company. The transactions then filter through that company in order to ultimately land in the merchant’s bank account. Along the way, however, several fees are taken out of the transaction. Among these fees are interchange fees.

Interchange fees are set fees that banks charge for completing the credit card transaction. These fees are typically assessed as a percentage of the transaction amount, with the average fee being 2%. Therefore, if you purchase an item for $10 at a store, $0.20 of that transaction is paid to the bank in the form of an interchange fee.

Effects on Pricing

Although a $0.20 fee for a $10 purchase may not sound like a whole lot, these interchange fees really add up for merchants. This is particularly true with smaller “mom and pop” establishments that already have very small profit margins. If they purchase an item for $8 and sell it for $10, for example, the $0.20 interchange fee leaves them with only $1.80, but much of this goes toward paying employees and otherwise keeping the establishment running. Therefore, many smaller businesses are claiming that interchange fees – which continue to go up – are effectively running them out of business.

For smaller stores dealing with interchange fees, they are faced with a conundrum: they can choose to stop accepting credit cards, but they may cause them to lose a great deal of business, or they can simply accept the credit card fees. In an effort to try to break even, many of these merchants choose to raise their prices to compensate for the interchange fees. Of course, if they raise them too much, they will no longer be competitive and business can suffer.

Rewards credit cards pose an even greater problem for some businesses because the costs of providing cardholders with these rewards is often passed onto the merchant. American Express is notorious for having hire interchange rates because of its rewards program, which is precisely why some businesses choose not to accept American Express credit cards.

About the Author: Shannon Kietzman is a well known author and trusted resource. Shannon regularly writes for . For more info and to order your credit report with FREE credit score please visit

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