Episode 49.
Credit Card Prices

Question:

Key Points:

• Back in 1949, a lot of people were using cash to buy things. Credit was offered, if at all, by the business itself
• In the 1920s, large stores started offering credit cards only for use at those stores
• In 1950, the diner's club was the first generic credit card. American Express was next and started in 1958
• The smart thing that both the Diner's Club and American Express did was not charge a fee to consumers but rather require a fee from the business
• Over time, more and more businesses have decided that they are better off paying the fee to the large credit card companies than to offer their own credit
• There are a few main reasons why businesses felt this way:
  1. Additional regulations have made it harder and harder for a business to keep up and pay for a whole department to do credit offerings
  2. The interchange fees have gone down
  3. As more and more businesses adobt major credit cards, it becomes more of an expectation from customers for a business to do so
• Once businesses felt like offering customers to pay with a credit card was a requirement, businesses really started pushing for the ability to charge a fee to their customers for using a credit card.
• The Dodd Frank Act (specifically the Durbin Amendment of that Act) did a lot of things to payments
  1. All businesses are federally allowed to give a discount for paying with cash
  2. There is a limit as to the interchange fee that can be charged for debit cards (but not credit cards)
• This has caused the interchange fees for credit cards to increase in order for the card processors to bring in the same income between both credit and debit when their debit price is being held down by the government
• This, in turn, caused a push for there to be a different price for debit and credit transations, so in 2013, that happened and the agreement with credit card companies changed to allow for a fee for using a credit card, though the fee is limited to the actual amount the business is paying in interchange fees
• Therefore, there are now 3 possible prices: (a) the "base" price, which must be the same for both a debit card and for a check, (b) a cash price, which can be less than the base price, and (c) a credit card price which can be higher than the base price by as much as the interchage fees
• This means that at a gas station, if you are considering paying with debit (or a check), you need to determine if the station is charging a fee for credit or offering a discount for cash
• If you get a reward for using your credit card at a gas station, then in order to know whether the best choice is to pay cash vs credit is to calculate the percent increase in price for credit vs cash and compare that to your cash back.
• Since most stations currently charge 10 cents extra/gallon for using a credit card, the price of the gas is an indication of what percent they are charging. If the price is higher than what is listed below, based on the cash back percentage you get, then you're actually better off financially to pay the extra charge for the credit card

  Reward Percent	Price
  1%	$10.00
  2%	$5.00
  3%	$3.33
  4%	$2.50

• If the gas station is charging a fee for credit, as opposed to giving a discount for cash, then any amount of a reward on debit would be better than paying cash. And the choice between debit and credit would be best made by considering the difference in rewards between your credit and debit card and then using the above table (assuming a 10 cent per gallon charge).