You can get a lot more details about how credit cards work at HowStuffWorks.com.
This page is intended to show you more about how the credit card companies make their money, even if you pay your bill on time and don't pay interest charges or annual fees. You'll get one small business' perspective on this toic here. With credit or debit cards available from many banks and credit unions, it is worth your while to shop around before picking out one to use.
Please note that you have control over the credit card you select to use -- you have some choice of terms. The "merchant accounts", accounts that retailers must have to accept credit cards, are chosen by the retailer. Just as your credit card terms are dictated by the card provider, the merchant account terms are dictated by the provider. But in both cases, there are choices that can be made by you and also by the retailer.
From the lenders, those who issue the credit cards, you'll get the consumer's pserspective -- the interest rates, monthly payments, other fees, etc. In this article, you'll get to see a little of the other side of the story. The big box stores and others that do very large annual dollar amounts of charge sales may be able to negotiate better terms than are mentioned here. The rates and fees referred to in the article are based on research of a number of credit card "merchant accounts" offered by banks, credit unions, and specialized card processing services. All these rates are subject to change without notice -- that's what their terms say, so I thought I'd better mention it, too.
If you have a credit card and you get a monthly paycheck, you might like being able to make one payment for perhaps a large number of purchases made at different locations throughout the month. Budgeting from weekly paychecks to make the bigger monthly payment may not be so easy, but most cards allow for paying less than the full balance over a number of months.
To rent a car or truck, you'll need a credit card. Purchasing airline tickets is easy online with a credit card, but you'll probably require the services of a travel agent if you want to pay cash.
Short on cash? A credit card fits the bill, or pays it, anyway. You'll find more individual reasons as you use your credit card. Probably the biggest advantage to the consumer is convenience. Personally, I don't mind holding up the checkout line while I write a check. The cash register has been doing the store's accounting. My accounting just happens to be done by hand. It's a bother to bring my computer and printer shopping with me.
Accepting credit cards brings in more business, especially impulse buying, where the purchases go beyond what the buyer originally planned, and may have had cash for.
To sell a big ticket item on time with monthly payments, accepting a credit card is as easy as taking a check for the total up front. The credit card company takes care of monthly billings, etc. The retailer gets paid, less fees, in a day or two. This also means the business does not need to do a credit check for every customer who wants to make monthly payments.
There is also some safety in having less cash on hand in the store, especially in 24-hour convenience stores and gas stations, which seem to be subject to robberies more often than most other kinds of stores. With credit cards, the money transfers are handled electronically within the banking system; the cash never sees the light of day!
You're almost certainly aware that you - the consumer - pays interest on any unpaid balance on your credit card bill. Look carefully: that interest may be calculated on the month-end balance (very unlikely), an "average daily balance" (a fairly popular technique at one time), or it may be calculated every day on the balance at the end of the day (most likely). How interest is calculated can make a big difference in how much you pay, especially if you use your account regularly.
Fees give many card providers their biggest profits. There are late fees, over-the-limit fees, and probably a dozen more fees that most people will never see. But, if circumstances are just right, you may end up paying $29, $35, or even more because a billing got filed with the Christmas cards instead of getting paid on time.
Default interest rates are another potential concern. Default interest rates are higher than your standard, good customer rate. For example, if you pay at least the minimum payment every month, your interest rate is 18%. If you miss a payment, your rate goes to 29% (the "default" rate), and possibly stays there until you pay off the balance. However, you may also be subject to the default interest rate if you are late on ANY other payment, like your electric bill, car payment, or bill from the doctor (perhaps while you're waiting for the insurance to clear). Not all credit card companies are this predatory, but many are. Read your agreement carefully, looking particularly for default interest rates.
You may think that "rewards" cards are cool, but they are more like a forced way of saving than of getting something for nothing. The retailer pays the cost of "rewards" and of necessity will pass this cost on the consumers.
Some credit cards may charge the consumer an annual fee for using the card. There are sometimes benefits to annual fee cards, like no prescribed spending limit, or a lower interest rate than the competition. Read your agreement carefully.
In order to accept credit cards, a merchant (here, "retailer") must open a "merchant account". This account includes an agreement with a company that will process credit card transactions for the retailer and transfer the money to a designated bank account, often the retailer's main checking account. Please note that some credit card agreements forbid the retailer from disclosing the terms the store has with its merchant account provider. They may also prohibit the retailer from charging different prices for cash and credit cards, or from giving discounts for cash. This article was written without any such encumbrances and does not violate any contractual agreements.
The retailer gets the advantage of possibly more or larger purchases by accepting credit cards, but there are direct and indirect costs that the store pays for the privilege of accepting credit cards. These costs must be passed on to the consumer in order for the retailer to remain profitable.
Every credit card sale shows up on the consumer's bill at the purchase price. If you bought a $100 item, you get billed for $100.
However, the retailer is charged a percentage of the credit card sale for the privilege of accepting credit cards. For that $100 purchase, only $97.50 to $98.50 will show up in the retailer's account. The credit card company keeps between 1.5% and 2.5%. This fee varies by type of card, and the "rewards" offered to the card holder.
Rewards cards are costly. If you get 4% back on your credit card purchases at the end of the year, you can figure that the retailer is only getting $94 or $95 on that $100 sale. The retailer is charged your "rewards" percentage plus the regular transaction percentage. Such additional charges can only mean that the price of items must be raised to cover that 5-6% expense. What really happens with rewards cards is that you are saving, and being charged for, a little bit of the cost each transaction for your own use later on. The retailer has charged you for it already to cover his "cost of doing business" with credit cards.
So if you pay for a $2000 cruise of $150 car rental on a charge card, the retailer is paying a lot of money, at 1,8% or so, for your business. With "rewards" or "miles", that 1.8% might reach 5% to 6% because of charges to the retailer. That expense will work its way into the price, like it or not.
To buy a $1.00 candy bar, only a couple of cents goes to the card company. But that's made up for in fixed transaction fees.
In addition to the percentage of sale cost to the retailer, there is also a fixed transaction fee for each credit transaction. This fixed fee is specified as a part of the merchant account contractual agreement. It can run from about 19 cents to as much as 35 cents per transaction.
With, say a 25 cent transaction fee plus 2%, that $1.00 candy bar could have sold for 73 cents cash, if credit cards were not accepted. And of course credit cards ARE accepted in order to bring in more sales. The credit card costs must be amortized across all transactions, so the more card sales, the more of that 25 cents plus 2% has to be tacked on to every sale, credit or cash.
There is sometimes a minimum monthly billing for a merchant account, which normally is easily met by large businesses. However, businesses with small retails sales may be charged added fees if charged sales aren't up to the minimum agreed upon.
There is often also a charge for the monthly statement, commonly in the $5 to $20 range. This applies regardless of the amount of charged sales during the month.
Since retailers are not in business to spend more than they bring in, all these fees will get passed along to the consumer in one form or another. The usual result is higher prices for everyone, whether you pay by cash or credit card.
ATM fees don't seem applicable in a retail store, but some have reported getting charged ATM fees when they make purchases with a debit card and provide their PIN. Watch your statements. If you get ATM fees at the checkout counter, don't provide your PIN anymore. Most debit cards will work like credit cards if you press CANCEL or ENTER instead of entering your PIN. (Ask the cashier to handle the transaction as "CREDIT" instead of "DEBIT".) The retailer will be charged a different, usually lower, percentage rate for a debit transaction than for a credit sale, so be firm in requesting credit. The checkout clerk probably knows nothing of these behind the scenes charges, and is only doing what their management asked them to do.
First of all, recognize that establishments that accept credit cards have expenses related to credit card purchases. Those costs will be passed along to consumers. Retailers that don't accept credit cards either will fall by the wayside, or have such a niche market that they can demand cash, and people will pay.
If the benefits of monthly billing and possibly monthly payments are incentive enough for you, use your card.
If you don't mind carrying cash, ask the retailer if you can have a discount for cash, especially for big ticket items. If it's not against the retailer's merchant account contract, you may be able to take a couple of percent off the price. It's worth asking, and at worst will get you a disbelieving blank stare from a salesperson who doesn't know what you now know about how credit cards work.
The choice may not always be yours, so while we still have greenbacks and pocket change to use, take advantage of that choice. And especially, enjoy knowing a little more about how credit cards work on the merchant's side. Informed consumers can make better choices.