How Dare They Let Me Be Stupid!

This apparently is the attitude of many consumers. There was a news article in my newspaper today (yes, I still get a paper) that indicated the shocking surprise that a man and woman had when they noticed a gas station’s price sign. The sign simply showed a much reduced price for a gallon of gas for cash versus the price for the same gallon purchased with a credit card. The couple seemed to think that this was not right and the station owner was somehow cheating them, as they decided to not purchase their gas at the station.

Now I don’t think that all consumers are represented by these two individuals; but I am equally sure that the couple does represent a large rather than trivial percentage of consumers. What were they shocked about? And more importantly, what did this startling revelation imply that they understood; or more to the point, what did it demonstrate that they had not understood about credit cards and costs to consumers?

The couple perhaps had never thought about the true and total costs of using a credit card. We can assume that they understood that when they charged something that they would pay interest on any unpaid balance that remained on their card after the billing date. This is a pretty basic and essential concept of credit cards. And while there are some folks that don’t grasp this concept, I have to believe that that group is less than one in ten people. Now if this is all that you understood about credit cards then seeing a difference between cash for gas versus credit for gas should probably tick you off.

But obviously there must be more to the true costs of credit cards then that, or I would not be discussing this. What the couple was not considering or aware of was that there are other costs when using credit cards not only for themselves, but also for the merchants who accept them and for everyone related to abuses attributable to the cards. The couple is likely to have a credit card issuer that charges them an annual account fee and there may be various charges for other events and situations related to their account, charges and payments. These extra charges all add to the true cost of using their credit card; but doesn’t explain why the gas station owner would presume to charge more for a credit purchase than a cash one.

What the couple is not factoring in is that the credit card companies do is to charge the merchants, who accept their cards for purchases, a percentage of the price that is being charged. Additionally the merchant has to have equipment for accepting the card, and today that means a system that allows them to have the credit card validated in real-time to help protect the consumer, the credit card company and themselves against fraud. This protection also adds a cost to the merchants operation, since there is a cost for the verification system/operation. Now you might argue that the validation cost is really a savings, since it prevents abuse. And you would be right, it does do that. However, it really only reduces the amount of abuse that the merchant is exposed to from the absolutely ridiculous to something more economical and “affordable”. There is still a cost of fraud to the merchant and you, and it comes in two phases. First the merchant is likely to be charged some amount of the fraud that is associated with their own operation; and then the merchants (and you and I) all have to absorb the cost of fraud from throughout the entire credit card issuer’s system. For every dollar of fraud that occurs on an issuer’s cards, the issuer makes that cost part of their operating expense and distributes that dollar into the costs that they charge in interest, in fees you pay directly, and in merchant fees that you pay indirectly. All this cost is why a credit card is more expensive to use than cash is. And it’s more expensive for everyone, and thus the reason that the gas station owner would offer you a better deal on cash.
For those of you to young to remember, when credit cards were yet to have become the necessity that they are today, it was not uncommon for merchants to offer a cash discount on the price to be able to keep more profits from their sales. Then more and more consumers became addicted to the plastic and merchants found out that they sold more stuff on plastic because people spent more than they could afford. So instead of encouraging you to go cash, the merchants helped trap our economy in the credit death spiral. And it has gotten so bad, that we may see more merchants experimenting with cast discounts to see if they can make more money this way.

But don’t blame the merchants. It’s the consumers that did this to the consumers. The couple is outraged because they have always been charging themselves more for everything; and they just hate that the gas station has the nerve to rub it in their faces.