Stop Subsidizing Credit Card Users


It is a question of fairness. People who use a product or service should be the ones who pay for it, not those who don't. The popularity of credit cards is in part due to the fact that part of the cost is paid by people who don't use them. The late U.S. senator William Proxmire explained it in a Senate hearing way back in 1984: 

...(W)hen you or I buy something with a credit card we get a bill at the end of the month and then we have another 30 days before we are hit with a finance charge. During this time, we have the use of the money. It is like an interest-free loan...But it isn't really free. Someone must pay for this credit. Initially, the merchant pays in the form of a merchant discount. When he sends our sales slip to the credit card company, he only gets back an average of 97 cents on the dollar. But most merchants operate on a very thin margin and few can afford to absorb the 3-percent charge. So what do they do? They increase their prices to cover their costs. Thus, everyone, cash customers as well as credit card customers, wind up paying...If practically everyone used credit cards, this wouldn't be so bad. But many people can't qualify for credit cards or don't want to use them. So what we have is a system where the poor subsidize the rich to the tune of $6 billion a year. This is the cost of the merchant discount reflected in retail prices.

That $6 billion was in 1984. In 2007, the U.S. credit card industry took in $42 billion in interchange fees (source).

An 8/14/06 article in the Lansing State Journal said that credit card use costs the average family $270 a year - whether they use them or not.

The solution is simple. Prohibit the card company from charging the merchant for any of the transaction cost. Require them instead to add the full cost to the cardholder’s bill. One “merchant” is already adding the fee to the purchase. The IRS allows taxpayers to pay with a credit card, but it charges 2.49% fee, according to a 3/14/05 article by Kathy Chu of the Associated Press: 

The fee – typically 2.49 percent of federal taxes, or about $88 on the average balance due of $3,523 – has been in place since the Internal Revenue Service first accepted tax payments by credit card in 1999. 

Thankfully, the IRS chooses not to pass on the cost of paying by credit card to other taxpayers.

I use a credit card and it doesn’t cost me anything because I pay off my bill each month. I charge about $1000 a month on my card. With a 3% transaction fee, I’d have to start shelling out $30 a month to pay for my credit card use. I wouldn’t like it at all, and I’d either curtail my use of the card or shop for a card with lower transaction costs.  

I think what would happen is that credit card companies would scramble to find ways to reduce fees. One way would be give cardholders a discount if they pay off their balances more quickly and frequently, not just once a month. That would shorten the period of the “loan”.

Here’s how I imagine my future credit card bill will look. It will list each transaction along with the transaction date, as it does now. The total amount due will be the sum of the following: 

  • the purchase amounts

  • the transaction processing charge, which is the number of purchases multiplied by a per-transaction fee, for example, $1

  • the interest charge, which is the total of the amounts calculated for each transaction from date of the purchase to the date of the bill

In addition to the total amount due on the billing date, the bill will show how much interest will be added for each additional day the bill goes unpaid.

A side benefit from requiring credit card holders to pay their own fees might be that it encourages them to pay off their balances sooner. That would make more money available for other loans, causing interest rates to drop.

Another benefit would be that stores would no longer need to issue their own credit cards to avoid the cost of the national cards. It would eliminate that expense for the stores and reduce the number of cards consumers have to carry around.