The True Cost of Credit

My former student Sean Harper has put together a nifty little web site,, that allows you to see how much merchants are charged when you use your credit card.

I was surprised at how high the fees were. For instance, in this example of a Mastercard, when you buy a $1.50 pack of gum at a convenience store, the credit-card company gets 28 cents. Even on big-ticket items like airline tickets, the credit-card company collects nearly 3 percent.

This is not to say that there is anything wrong with those fees. I presume that the issuing banks can choose their own fees (within reason), and that there is more or less free entry — which suggests that the industry should be pretty competitive. Merchants accept credit cards, which implies that the benefits of doing so outweigh the costs.

Nonetheless, credit-card fees turn out to be a big cost of being a retailer. According to the numbers at the web site, if everyone used a credit card when shopping at Best Buy, credit-card companies would collect roughly $1 billion a year in fees from Best Buy.

(See also a nice post on about


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  1. Matt says:

    I guess a part of this amount is due to fraud and the relative risk of credit card payments — the other part of course for the fact that you pay one month after the purchase.

    Here in Europe people usually use Maestro cards as method of payment. There are some differences to credit card. First: you are billed usually one to three days after the purchase. On the other hand the cost of the transaction for the retailer are either a fixed percentage (0.25 to 1%) if PIN codes are used or a fixed sum of 0.05 to 0.50 Euro cents if signature is used. The difference is that payments with signature lay a far greater risk to the retailer while payments with PIN are expensive but there is no risk for the retailer.

    Of course every retailer who allows payment by Maestro usually is able to accept credit cards. So when purchasing goods worth over 100$ it is a good idea to ask for a discount for payment by Maestro if a retailer accepts credit cards. He’ll usually pass you the difference he would pay more for the creadit card transaction.

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  2. Grant says:

    I used to work as management in several retail companies. I know to some people this sounds like the credit card companies are taking a lot of money from the retailers. But when you think about the idea that a lot of products in retail stores have between a 150-300% mark-up from wholesale, most retail companies are still making plenty of profit off of you, even when you use a credit card.

    So I have very little sympathy for the complaining retailers. In fact, given the knowledge that consumers spend more on credit card than they would have if they only used cash, I think the retailers in the big picture are making more money by accepting credit cards then they ever would by being cash only.

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  3. thomas says:

    There really isn’t free entry into the credit market. The existence of the companies in the field is based solely on build up of early market share. Now it is impossible to gain entry. In addition, the market is run like an oligopoly that exists to increase market share. Instead of reducing the fees, the companies provide cash back to the individuals which in turn causes them to increase their usage of the card.

    Credit card companies have businesses by the balls.

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  4. D says:

    I imagine the cost of cash isn’t zero either, if everyone used credit cards, you wouldn’t need to count, secure and transport the cash you need for a business.

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  5. Jesus says:

    Credit has become like a disease, credit cards are a total robbery, the problem is that after spending with them, people realize that is an extension of their incomes and thats what is so harmful. Credit is a multi billion business and people should find out the dimension of this or spend your hole life making bankers rich.

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  6. Kevin says:

    There’s a cost to other transactions, of course. Cash transactions require the cashier to make change (and have enough change on-hand) and require someone to deposit that cash in the bank, and may require a safe, and carry the risk of additional errors and theft. Checks take much longer to process, and therefore require higher labor costs. Check payments are also much more likely to be invalid, and therefore result in no payment.

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  7. DrS says:

    And since these fees would obviously cause prices to go up, I wonder if, factoring this in, if we would have had net deflation, or at least very low inflation, over the past decade or so… despite tripling the currency supply.

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  8. Chris says:

    I disagree with the idea that the credit card business is easy to enter, or competitive. It’s difficult to get retailers to take your card, and requires going around and asking all of them. Even for companies like American Express, one of their biggest costs is going out and getting businesses to accept their cards (and AmEx’s higher fees).

    As for competitive fees, regular card fees are only 1.5%, but rewards cards are up to 3.5% and their costs are borne entirely by retailers, not by the card issuers.

    The credit and charge card industry is huge, as are their profits, which are earned on a non-service. Retailers provide goods, and have to take a haircut of up to 3 points as a “handling fee” for these cards. That is criminal. My family’s grocery store went from almost 100% cash 20 years ago, to less than 50% cash today. That is a result of lifestyle changes by consumers, and the fact that no one carries cash anymore.

    Indeed, I think that the solution needs to be the introduction of new, low cost credit cards by a large business like Wal-Mart, who could afford to enter the business. Wal-Mart already struck a blow for the small retailer and large retailer alike, when they got debit card purchases down to a fixed cost and off of a percentage–like a check.

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