Credit card use for freeYou're not paying for the free loan from the transaction date until the settlement date. You're not paying for all the consumer protections your credit card gives you. You're not paying for the production or mailing either of it or the monthly statements you receive. You're not paying for the goodies your rewards credit cards give you, nor the perks your card delivers, nor the overheads of running your credit card companies. But somebody is. Generally speaking, card issuers have just three main sources of income:
- Annual fees, usually paid by those who want special perks from their cards (for instance, privileges at airports) or who have too low a credit score to qualify for a card that doesn't charge such fees.
- Interest, paid at currently high credit card rates, by those who can't settle their accounts in full at the end of each billing cycle. You can also add into this category penalty fees paid for going over your limit or for making late payments.
- Interchange fees, nominally paid by merchants, but, arguably, a cost passed on to all customers in the form of higher prices. Some estimates suggest that interchange fees are costing U.S. merchants (or their customers) $50 billion a year.
Credit card companies and a perfect stormSo now for the big new threat. In mid-July, MasterCard, Visa and a number of big credit card companies offered to settle a law suit brought by retailers involving the interchange fee market. The defendants agreed to pay out about $6 billion in cash, and a further $1.2 billion in discounted swipe fees over the coming months. More importantly for the long term, those defendants have also agreed to allow merchants to charge more to customers who opt to pay with credit cards, and/or to offer discounts to those who pay using cash, checks or debit cards. In other words, you could soon be faced with a stark choice: pay a lower price or use your credit cards.
What happens next is likely to depend on how consumers react to that offer. But if enough eschew their credit cards and turn to other payment methods, that almost inevitably should see credit card companies' revenues from interchange fees decline.