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


When gas prices went sky high this summer, I noticed that gas stations around here (in NJ) started offering dual pricing for gas; one price for credit, one for cash. I assume that they were trying to pass some of the credit card fees onto their customers. If other businesses were more transparent about credit card fees (say, by giving a 2 or 3% discount for cash), I'm sure there are a lot of consumers who would go that route. Since most businesses don' do thatt, I'm happy to collect my credit card "rewards."


I read that durring the summer gas peak, some small franchises were really hurting becaue they get paid a fixed rate (cents per gallon) by the supplier (Shell, Chevron etc) but have to cover the CC chares as a percentage. So the number of gallons sold didn't change, so the 'income' didn't change, but the CC transaction charges went way up.

I think merchents would do well to teach their staff this stuff. When buying with my bank card, I've been asked if I want to use it as Debit or Credit, and I'll say "I don't care, but Debit costs you less" and they'll ring it up as Credit.

Nick F.

What gets me about this is actually how much lower the cost to the retailers is than the surcharge I often pay for using a credit card.

While most often, stores don't care if I pay by cash or credit, a local pizza place routinely charges $3-$5 for the convienence of using a card. According to the info this site just gave me, that means the pizza place is making $1-$3 off of my card.

Just Another Reader


Are you serious? POS terminals are not ATMs. Are you sure you got charged by your bank for using a POS and getting cash back?

The bank regulators might be able to help:


on the current economic debacle: I took a brief course in Economic 40 yrs ago (101). about the only things I learned and still focus on are :
supply and demand
money supply
velocity of money
multiplier of money (eg lending) which has a > 8:1 effect.
These items alone with the FEDS low cost of money and
ease of credit limits, and the slicing/dicing and packaging of assets, explains all the nastiness. Add to that the speed and globalization of the worlds economies and you have current meltdown. 100 yrs ago, it was more localized and in slow motion.
This will keep happening, as always, every 5-7 years.


You may wish to tell your former student, at least in my case, the site produces the following result:

"Coming soon: Another fine website hosted by WebFaction.

Site not configured
If you are the owner of this site and weren't expecting to see this message, it could happen for a number of reasons:

You recently created a new website record and visited it before it got set up.
You added a new domain in the control panel but didn't create a site record to link it with an application.
Your website record is set for HTTPS, but you visited a HTTP URL (or vice-versa).
You tried to visit your website by IP address.
For more details, please take a look at the following knowledge base article: Why do I get "Site not configured" message?

WebFaction provides modern hosting with friendly customer support. Visit our main website for more information."

Nathan Marik

There have been a multitude of studies that show the average purchase is higher on a CC then when people are paying in cash, so the retailers more than make up for it. Additionally, there is an element or risk reduction the retailer received for that fee.

I can't speak for Mastercard but I know that Visa actually sets that interchange rate (based on the bin number of the card) so the issuing bank actually has very little control over it.

Kathy A.

On credit cards, my fees range from 1.64 to 3.80% (plus 20 cents per transaction), with little way for me to tell when the consumer presents the card what I'll pay. But my bank charges me if I deposit too much cash or too many checks (not to mention the risk of counterfeit currency or bad checks).

For those saying there should be a discount for using other forms of payment: for many merchants (myself included), part of our credit card processing agreement forbids us from charging a different price for credit purchases. Some firms or industries may be able to negotiate that away, but it's very rare.


I suspect things might be different in the US where debit and credit are often the same card. But in Canada, I use my credit card almost exclusively, because if a waiter double charges me when he goes to add the tip, or the sketchy gas station I was at turned out to be skimming card numbers, I'm not liable for the charges on my credit card, and I just dispute them and don't pay them ( and both of these have happened to me, so they're not hypothetical ).

If I've used my debit card, on the other hand, the money is now gone from my account, and I have to fight to get it back, running up overdraft fees all the while.

Between that level of added security and airmiles, MasterCard is my payment method of choice for anything and everything. My debit card comes out only when I need cash, or they won't take credit.


AFAIK, surcharges for using credit cards violate most agreements between merchants and the credit card companies.

The gasoline issue was a real one, so much so that higher gas prices meant less money for gas stations, rather than more or even the same amount.

If gas station profits per gallon before a 3% credit card fee are fixed at 20 cents, gas at $1.50 means $1.30 to buy the gas and 4.5 cents for the CC company, leaving 15.5 cents in profit.

Gas at $4.00 means $4.80 to buy the gas and 12 cents for the CC company, leaving 8 cents in profit.

I read articles that, to avoid this, gas stations were going to offer discounts for people who bought prepaid pay-at-the-pump gas cards, so at least they didn't have to pay the per-transaction charge (which is often in addition to the per dollar charge) so many times.


In the UK the Office of Fair Trading is investigating interchange fees. Something similar is under way Europe-wide.

As a further note about the costs businesses incur: my bank charges business customers for all deposits (cash or cheque) they make to their accounts. It charges extra for using the nightsafe (i,e. the ability to drop cash off out of working hours into a safe on the bank's premises, rather than having their own safe plus insurance). It charges business customers each time they exchange cash for cash (i.e. come in with notes and go away with coin to make change for their customers). Banks are profit-making businesses (well, usually) and will charge at every opportunity.

[People who have personal bank accounts in the UK aren't really used to this concept of charges for all types of transaction even when your account is being run correctly, and in credit. If you've ever resented large branches having a dedicated till for business customers, remember that they are paying for it!]



Retailers COULD offer discounts for cash -- but as others have cited, cash (and checks) have their own inherent costs.

In addition, retailers are WELL AWARE that when customer's pay using credit cards they tend to buy MORE than they do when paying cash; so a 10% (or higher) increase in sales (and often of the more highly profitable "impulse-buy" products) -- which more than covers the costs of doing CC sales.

Eric M. Jones

American Express: "The card with no preset spending limit..."
Eric: Okay, can I charge $80,000?
American Express: That would be above your spending limit.
Eric: Then what's my spending limit?
American Express.....(silence)


There is nothing surprising about this. Stores agree to pay credit card fees because customers like myself, who rarely carry cash, can freely buy their products. I have often walked out of a store when I learned they didn't accept credit cards; not out of anger, simply because I didn't have a means to pay.

On the flip side, I have seen businesses offer discounts for paying cash. This can certainly be partly explained by the ability to "hide" cash receipts, especially in the service industry (I often see mechanics offering cash discounts). But, I'm sure part of it is because the discount is less than the fee they would pay on a credit card purchase.

What I'm curious about is the way these fees get passed down to consumers. Obviously, if they are worked into a fixed price point, than that is that. But I have frequented stores that charge a "credit card fee" sometimes upwards of $2, in spite of the fact that I have seen numerous sources claiming this is illegal and that the fees can not be directly passed on to the consumer. Anyone know more about this?



As someone who doesn't live in Manhattan or San Francisco, I feel obligated to point out that yes, there are large portions of this country (you know, all those brown bits you fly over) where cash is still king.

If your 'convenience' is so valuable that paying extra for everything with a credit card is worth it, I envy you. Me, I'm happy with greenbacks.


My bank pays me a dime every time I use I chose credit rather than debit. I know they make more money this way, but as much as I use my card the cash adds up.


Some shops only allow credit card transactions with a minimum purchase of $5 or $10.

rocket surgeon

Different retailers pay different discount rates.

In exchange for accepting credit cards, retailers receive several benefits:
-the sense of legitimacy that a 'cash only' business lacks.
-the ease of spending a consumer feels compared with withdrawing, pulling out and counting a wad of bills (can easily make up the 3%)
-for some cards, the assurance of an extra year of warranty for consumers. (Can resolve some sticky repair issues for retailers)

Along with some costs not mentioned:
-the fear of fraud.. which can result in extra steps in transaction processing and repeated incidents can result in lost revenue.
-the discount rate is not deducted when a refund is given back to the consumer.. This sometimes is passed on as a service fee, but most often is absorbed by the retailer.
-Amex takes longer to pay and charges a higher discount rate.


There is a HUGE barrier to entry in the credit card field. The current credit card oligopoly can charge whatever they want, and businesses are in NO position to stop accepting the main players.


Credit cards, when used properly (as a substitute for cash), can be a huge boon to anyone's financial situation, as long as the cardholder gets reward points that can be used toward the purchase of products that he or she would buy even without the points.

Unfortunately, they're more often used as a means to get stuff that the cardholder can't actually afford at present, and end up crippling them in the long run.

I wish stuff like this was taught in school.