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Using Credit Cards Means Buying Two Products Instead Of One

Americans are in the habit of using credit cards to buy almost everything that’s for sale these days, but they don’t often know a lot about the cost of using them. I was reminded of this when I saw a tweet from a hockey writer today:

How is it legal for a gas station to charge different prices for cash and credit? What a sham.
@jessespector
Jesse Spector

Now, I’m not 100 percent certain that Jesse was in a place where gas was cheaper when purchased with cash. It could’ve been the other way around – that is, a place where cash was more expensive. But I doubt it.

Using credit cards carries hidden costs

Using credit cards costs money, and businesses pass the cost on to their customers. (PHOTO: Flickr user eric731, used under Create Commons license)

When you buy a gallon of gasoline at a filling station with cash, you’re just buying that gallon of gasoline. But when you buy it using credit cards, you’re actually purchasing two products. The first is the gallon of gasoline. The second is the use of whatever payment processing network he uses in order to allow you to use your credit at his filling station. By setting a more expensive price for using credit, the owner of the filling is including the price of using the payment.

Just as it costs more to pay someone to deliver a package to your door than it does to pick the package up yourself, it costs more to let someone else handle money exchanges for you than it does to handle them yourself. Credit makes life more convenient, and we pay for that convenience.

None of this is to imply anything one way or the other about using credit cards, which can be very handy when used properly. It’s just that only when something draws your attention to the fine print do you learn how much you’re actually paying. Credit card payment processors typically charge a flat fee – say, 20 cents per card swipe – plus a small percentage of each bill. (As an aside, this is one of the reasons Bitcoins are growing in popularity: using them is often free of such fees, and even at their most expensive they are vastly cheaper than traditional credit systems with all their middlemen.)

So if you ever come across a business that charges more for using credit than it does for using cash, you know why. And if you come across one that does things in reverse, you’ll know to take your money elsewhere!