Ha! Title bait!

The experts say to use provocative headlines, preferably ones that confirm people’s preconceived notions. And people do love to whine about credit card issuers. The experts also say that “list” titles draw lots of attention. There aren’t 37 of anything in this post, but there are plenty of examples of how you can use a credit card to your advantage.

Credit card issuers don’t screw anyone over. Seriously, they’re among the most honest businesses out there. Unlike some auto manufacturers and investment banks, no credit card company we know of is peddling influence in the White House or on Capitol Hill. The next time we at Control Your Cash hear of a credit card issuer truly shortchanging a customer will be the first. (If there’s something we’re missing, tell us. That’s what the comments section is for.)

Why the bad rap?

Because of the monthly statements. And the human propensity for blocking out disagreeable things. You buy things on the card all month, your wallet doesn’t literally get any lighter, and when the bill arrives you see your expenses added together and presented in boldface. For most people, spending $20 on dinner is no big deal. Doing it 15 times a month and having to pay $300 at once is.

Imagine if you received a monthly statement listing the total number of times you used profanity. Or the amount of alcohol you consumed. Or for the fellas reading this, the total number of sexual thoughts you had about the women you come in contact with every day. Once those totals are tallied, and printed, they can get sobering.

Not evil

How do credit card issuers make their money? 

When I was a kid, I couldn’t understand it. You pay the same amount you’d pay if you’d used cash, but you don’t have to settle up for a month? What’s better than that? Who’s the fool who invented credit cards, and how much money is he squandering on this idiotic idea? I only hope credit cards are still around by the time I reach the age of majority, and that MasterCard doesn’t realize the error of its ways and go out of business before then.

It never occurred to my 9-year-old head that people might not pay their bills in full by the due date. Nor that AmEx and VISA know this well, and use it to their advantage.

If you don’t like credit, don’t use it. If you can’t handle it, ditto. Many people take the position that credit card companies are out to take advantage of us. They aren’t.

The little-known profit center

Most merchants would prefer you pay cash, because credit card issuers charge the merchants a fee (we’ll call it 2%, on average) when you use a card.

So why would any business take cards? Because every business takes cards.

It’s become a cost of doing business. Hilton Hotels could probably save a little money in the short term if they didn’t put soap in their bathrooms. But unless Carlson Companies followed suit, people would flock to Carlson hotels rather than carry their own soap on the road. Carlson would adopt the slogan “We’ll leave the dispenser full for you®,” and Hilton would lose business. Soap is a necessary expenditure, just like credit card merchant fees.

Not every business takes cards. But every business decision-maker has to answer this question – “Is it worth it to raise my prices a little, if doing so will make it more convenient for customers to buy my products?” Most businesses will say yes.

There are exceptions. A very small business – e.g. the fruit stand at the weekly farmer’s market – might not bother to set up an account with a credit card issuer. It’s easier for such a business to insist on cash only, though that might mean forgoing the occasional sale. Besides, the fruit stand’s prospective customers are each only going to be spending a few bucks anyway. If the fruit stand routinely made hundred-dollar sales, and thus had customers who don’t typically carry enough cash to cover a purchase – it’d probably accept credit cards.

Small, transitory, and casually licensed businesses aren’t the only ones that refuse credit cards. Peter Luger Steakhouse in New York is famous for only accepting cash. But after so many years, Peter Luger’s insistence on cash is practically part of its decor – like the gray-haired waiters and the oak paneling on the walls.

Send me your money

The vast majority of credit card issuers’ income derives from interest payments, paid by cardholders who refuse to pay their balances every month. (Estimates among the four major credit card companies in the United States – American Express, VISA, MasterCard and Discover – put interest payments and late fees at around 75% of total revenue.)

On top of that, there’s that transaction fee charged to merchants.

The latter is more politically palatable, and less visible to government regulation. That’s why Congress passes laws capping interest rates, but cares little about transaction fee rates: monthly credit card statements are tangible, they’re occasionally shocking, and everyone gets them. Meanwhile, transaction fees are hidden in every purchase. In fact, they’re hidden so well that most consumers don’t think twice about them, and assume that there can never be a difference between the price a retailer charges when you pay with a credit card, and the price a retailer charges when you pay cash. Those transaction fees might be a smaller revenue source than interest payments are, but transaction fees depend less on consumers’ sense of responsibility. If people started paying their bills on time, those 2% transaction fees would become more critical to credit card issuers’ bottom lines.

How can I use this to my advantage?

Most retailers charge the same price for an item whether the customer pays via cash or credit card. (If a credit card issuer charges 2%, and the customer’s buying a $1.50 coffee, it’s hardly worth it to give the customer 3¢ off. Plus you’d have to be fairly cheap to ask for such a discount.)

But with big-ticket items – and even something like a tank of gas can qualify as a big-ticket item these days – paying with cash instead of a credit can indeed save you that 2% fee.

Gas retailer ARCO is notorious for this, also charging an additional 35¢ flat fee for credit card purchases. For most of us who don’t live in Oregon or New Jersey, the convenience of self-serve means it’s not worth walking into the store to pay cash and save the 35¢ fee.

Nominally, that 2% is paid by the retailer. In practice, the issuer passes the fee on to you. Ideally, this is a capitalist transaction in which everyone benefits – the issuer gets its fee, the retailer attracts business by letting you pay with something other than inconvenient cash, and you gladly (even unconsciously) pay a small premium for the privilege of not having to carry cash.

Oh, and just pay your balance on time. It makes life so much easier.