how do credit cards work -- does the cc company get $ every time I use it?

Discussion in 'Community Discussion' started by rawdawg, May 19, 2010.

  1. rawdawg macrumors 6502

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    #1
    I keep track of my spending with Quicken. It is hard to keep track of cash. For that reason I use my credit card every chance I get. I've heard in the past credit card companies charge the vendor to use their services. That is why some places have been slow to adopt or still don't take credit cards. Recently a cab driver told me they take something like $1-2 each time it's used in his cab. I'm sure that is a special case, but this certainly drives up prices and stores have placed credit card minimums to make it worth their cost.

    What really upsets me, if this is all true, is that basically we're paying credit card companies to use our own money. I know ATM's do the same thing which is why I try to avoid the ones that charge. I'm fundamentally opposed to this.

    Is this true? How does it work?
     
  2. brn2ski00 macrumors 68020

    brn2ski00

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    #2
    right, the vendor pays the merchant for every time a CC is used at their store.
     
  3. ucfgrad93 macrumors P6

    ucfgrad93

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    #4
    The merchant pays a percentage of each transaction to the Visa/Mastercard/American Express, etc. I think it may be 2-3% of the value of the transaction. It may cost the merchant money for each transaction, but they would probably lose more in sales if they didn't accept credit cards.

    If you are using a credit card, then it really isn't your own money. It is credit that the issuer is extending to you on your promise to pay it back. A debit card, on the other hand, is linked to money you already have.
     
  4. rhsgolfer33 macrumors 6502a

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    #5
    No, the merchant is paying the credit card company for the ability to process payments via credit card which will hopefully increase sales and ease of purchase for customers. You're not paying anything to use the card, unless of course, you carry a balance or have an annual fee.

    It should also be clarified, you're not paying to use your money, you're paying to use credit; credit is not equivalent to money you have in your checking account. These companies extend you credit expecting to be compensated in some way for providing that service; you wouldn't wash cars for free all day long and a credit card company certainly isn't going to extend credit to customers for free either. One way these companies make money is by charging merchants a small fee to process purchases via credit card, its not evil or fundamentally wrong in any way; in fact, it is a fairly mutually beneficial business relationship for both sides if the merchant's business proves to be successful.
     
  5. yg17 macrumors G5

    yg17

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    #6
    Not necessarily. It's already been said that it's not technically you're money, but for the sake of argument, lets say it is. Now lets say a store is cash only. At the end of the day, they'll have a lot more cash to count which will take more time, and the bank will be spending more time doing whatever they do with their cash at the end of the day once it's deposited into the merchant's account. Time is money, so prices would still be increased to compensate for the longer hours employees have to work and bank fees would be increased for the same reason. So even with cash, you would be paying to spend your own money.
     
  6. rawdawg thread starter macrumors 6502

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    #7
    thanks for everyone's feedback. I knew certain points would be raised. I guess that was unavoidable. The counting cash was a good point, but it seems that currency needs a new form much like the gold standard back in the day.

    To clarify I don't have a credit card that at the end of the month I choose to pay off or not. My credit card is my debit card. The money I spend gets deducted a day after I use it on nearly every transaction, there is no bill at the end of the month. I therefore never carry a balance and unless you want to get specific (again...unavoidable) about the credit card's cashflow I don't ever "borrow" any money.

    Of course it is true using this type of card isn't a 'wire transaction' so there will be borrowed money in the interim. But for my means and purposes I consider it "my money" and don't want others to capitalize off what I also consider to be a loophole for business suits to create paychecks for themselves.

    What I consider doesn't count for a whole lot though. This could easily get political but as long as my money is going somewhere to support this "luxury" I'd want it to go to the US Treasury. I don't feel Wall St deserves this type of business which in today's world is a prerequisite for survival.

    See where I'm going with this?
     
  7. notjustjay macrumors 603

    notjustjay

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    #8
    But, you DO borrow that money, even if it's only for one day. When you walked into the shop, you didn't have cash (or didn't use cash). The shop still got money, and a day later, the cash disappeared from your account. (Which is a really cool concept for a credit/debit card, by the way!) So you did borrow that money from someone.

    If you pay off your balance in full all the time (which you obviously do) then you don't get charged a penny in interest. However, the credit card company is still doing the work of extending you credit, loaning you money so you can pay the shop, even taking care of that funds transfer on your behalf. They still want to be paid for this service. They don't charge you, so they charge the shop.
     
  8. rhsgolfer33 macrumors 6502a

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    Jan 6, 2006
    #9
    Not really...

    The credit card companies provide a service that is beneficial to merchants, it is reasonable for credit card companies to get paid for providing that service just like it is reasonable for a lawyer or accountant to get paid for providing his or her services. Accepting credit cards is a choice not something merchants are forced to do (I frequent a number of places that don't take credit cards); if a merchant chooses to accept credit cards to make it marginally easier for customers in an attempt to increase sales, then they'll have to pay a small fee for using the credit card company's service.

    You can easily survive without a debit/credit card, ask my grandparents.
     
  9. JNB macrumors 604

    JNB

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    #10
    This is a major part of my LOB, so I'll give the simple version.

    The major issuers (MasterCard, Visa, AMEX, etc) typically charge the accepting merchant two fees: the transaction fee and the "discount". The transaction fee ranges commonly from $0.20-$0.45 per transaction. The discount ranges from 4% to 18%. The specific amount depends on the issuer and volume of business the merchant runs through the issuer; the more business, the lower the fees per charge. AMEX is the worst, which is why you see them accepted at fewer places.

    This explains why a lot of very small operators require a minimum purchase. If you bought a pack of gum on your CC, they lose money. FYI, that requirement is a violation of the Merchant Agreement; once they agree to accept the card, they are mandated to accept it for any transaction. This is overlooked in most cases, because the issuers are happy to capture whatever they can.

    Does the consumer pay any of this? Absolutely. The price you pay for anything includes the required additional markup to recoup the associated costs to the merchant. In fact, if you pay by cash or check, the merchant makes more money, since there's no transaction fees or discount to pay to the issuers.

    ACH transactions (debit cards) have no discount, but do have a transaction fee involved, generally in the neighborhood of $0.20.
     
  10. duncanapple macrumors 6502

    Joined:
    Jun 12, 2008
    #11
    All of the merchants costs are built into what you buy. Its not to say the price would come down if you didnt use a credit card - though sometimes you will find merchants that will give you a cheaper price if you offer cash. My car insurance company gives a discount for paying via checking vs credit card. I bought a couch cheaper bc i used a debit vs credit card. Usually higher dollar items are more negotiable than smaller items.

    One other point to the OP - I wouldn't be too turned off by credit cards if I were you. If you pay the balance off every month (which is sounds like you would since you are pretty much doing that right now, if not immediately) you can make money off of them vs the other way around. First, you basically get a free 30 day loan (at least - the time between when your statement month cuts off and the time the bill is due) which isnt much but something if your checking/savings gives you interest. The big one though is the rewards. I get 1% back on my discover card for all purchases, plus I get 5% back on certain things certain times of the year. Each quarter is different. Sometimes it's groceries, sometimes gas, sometimes clothes, vacations, etc. There are also certain merchants that get 5% bonus all the time. I bought my now wifes engagement ring with my card and got 5% back on that :eek: which was a chunk of free money.

    Not only that but it builds your credit score (which leads to lower rates on home and auto loans - also saving you money) and it helps you track your expenses. Most cards have some great tools online to dice and slice your spending habits.

    I sound like a commercial lol - but if used RESPONSIBLY a credit card is a great thing!
     
  11. cantthinkofone macrumors 65816

    cantthinkofone

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    #12
    They make money on the fees and interest they charge.

    They don't make squat on merchants. They make it when you have a $2000 balance, and 23% interest and pay the minimum payment. You will pay probably $6-7,000 before its all over if you pay the minimum payments.

    If you pay the balance off every month then good. But if you can't don't use a card. You will buy 10 burgers by the time it's all over for that one value meal burger you bought in the first place.
     
  12. rhsgolfer33 macrumors 6502a

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    Jan 6, 2006
    #13
    Banks don't make money off of merchants, but MasterCard and Visa do. If MasterCard and Visa didn't charge merchants they wouldn't be in business. Though we often speak (I'm definitely guilty of this) as though MasteCard and Visa are the same as the company extending us credit, they usually aren't. The company that extends you credit, usually a bank, makes money via fees and interest, MasterCard and Visa make money mostly through merchant fees (and they make a fair amount more than squat; MasterCard did close to $5 billion in revenue in 2008).
     
  13. notjustjay macrumors 603

    notjustjay

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    Canada, eh?
    #14
    I volunteer with a camp that has fairly recently started taking credit cards using Visa/Mastercard. Prior to this, parents had to pay camper fees by check.

    Our merchant account costs us $10/month to have the service, plus a fee per transaction that's on the order of 65 cents (Canadian) plus 2% of the transaction amount.

    So we pay $600-1000 per year in fees, but we find it very convenient as it now allows parents to pay instantly (they can give their credit card information over the phone or fax) instead of mailing a check. We deal with fewer bounced checks and, indeed, fewer checks period -- I'd say today about 95% of our fees are paid by credit cards. People are more willing to pay the entire amount in full instead of giving a deposit, which means more cash is available to camp sooner.

    It has also increased sales of merchandise. Little Johnny checks out of camp and sees a cool camp T-shirt but mom used to say "Sorry dear, mommy only has $20 in her purse, and we forgot to bring our checks"... now mom says "OK, let's buy one for Johnny, and one for his sister too, we'll charge it all on our Visa."
     
  14. RedTomato macrumors 68040

    RedTomato

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    .. London ..
    #15
    Part of the cc/debit service charge goes towards servicing their giant computer and phone networks that deal with millions of calls and transactions per second. And paying for their slimy adverts.
     
  15. Gregg2 macrumors 603

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    Milwaukee, WI
    #16
    From that link:
    Like he says:
    That's precisely why many merchants will not accept Discover. Due to the cashback feature for cardholders, the fees are higher.
     
  16. citizenzen macrumors 65816

    Joined:
    Mar 22, 2010
    #17
    This is something I only discovered recently. When a merchant asks you if you want to use debit or credit the merchant will make more money if you say "debit".

    There may be other reasons to choose "credit". But if you want to keep more money in the hands of your local merchants run those transactions as "debit".
     
  17. aristobrat macrumors G5

    Joined:
    Oct 14, 2005
    #18
    I thought merchants dealt directly with (and got their rates from) the "middle" company they pick to authorize their transactions (Chase Paymentech, Bank of America merchant sevices, etc), not directly from the issuers (Visa/Mastercard/etc).
     
  18. CaptMurdock macrumors 6502a

    CaptMurdock

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    #19
    We have a credit card terminal in our law office. My boss hates it. It's a necessary evil, as lots of people have credit cards but don't have huge amounts of money to drop for a retainer.

    We have tell people that we don't take credit cards for the consultation, but we will take them for the retainer, all because of what the CC machine company dings us for.
     
  19. GoCubsGo macrumors Nehalem

    GoCubsGo

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    Feb 19, 2005
    #20
    I think there is some good information here but frankly if you're not sure how credit cards work then why do you use them?
     
  20. Rodimus Prime macrumors G4

    Rodimus Prime

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    Oct 9, 2006
    #21
    Also the same reason a lot of places to not accept american express.
    My primary card is an American express that gives pretty nice cash back. for the first $6500 I spend in a year I get 0.5% on everything and 1.5% on gas, drug, and food. After 6500 it goes up to 1.5% and 5%.

    Now something a lot of people do who carry AMEX or discover as a primary card we all have a VISA/Master card as a backup card. AMEX is my primary card and if a place does not take that I pull out my VISA.

    I pay off my cards in full every month so I never pay interested on them. I personally use them to track my spending more than anything else.
     
  21. JNB macrumors 604

    JNB

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    #22
    True, but that's why I said it was the "simple" answer. There can be several intermediaries, all adding a bit on top, but boiling down to the basic concept was my goal.
     
  22. sammich macrumors 601

    sammich

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    #23
    Okay, I was certain about this but now I'm not so sure. I was sure that Amex here in Australia had lowered it's merchant rates considerably to levels similar to Visa/MC (~1.7%) in order to push consumers to use it for everyday shopping (they have ads everywhere, "not just for big things").

    Also, my parents got an American Express CC for nothing as part of some deal with the bank we had out original CC with. It's linked to the same account/same limit etc but you get all the perks of triple the loyalty points.
     
  23. Gregg2 macrumors 603

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    May 22, 2008
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    Milwaukee, WI
    #24
    Yep. I use Discover first, M/C as a backup. Doesn't AMEX require you to pay the balance in full each month? I've heard or read that before, and always wondered how they make a profit. Is their only revenue stream the membership fee?

    I'm a "charter member" of Discover, having opened the account soon after Sears launched the card. It's not owned by Sears anymore, of course. They tried to trick me once. A new "premium" card was introduced with an annual fee and double cashback reward. I got one, but did not close the original account. After about a year, the cashback reward was reduced. I called and asked if there was any difference in the original account and the "premium" account except for the annual fee. I then closed the "premium" account, so you know what their answer was. So, the moral to the story is if they push you, push back.

    I have two M/C accounts, one for me, one for business. Neither of them has an annual fee.
     
  24. RedTomato macrumors 68040

    RedTomato

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    #25
    If I was a small merchant, I'd offer a free lollipop or a sticker to everyone who pays with a debit card or cash. If they asked why, I'd explain.

    There's gotta be a way of promoting non-cc use that doesn't fall foul of the contract merchants sign with cc companies.

    I'm not saying stop using cc - I use them myself and they're good for when I'm out of cash - but cash / debit payers shouldn't be paying for the cc companies. And it's good to support local shops by making sure more of your money goes to them.
     

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