Jun 24 2008

2 things: ‘Saving’ money & merchant fees

I’ve recently read some posts from bloggers that made me say, “Interesting! Let’s think about this some more.”

First up is Cleverdude, who challenges us to change the way we think about saving money.

How many times have you visited a department store, found a great clearance, and bought a $100-something for 75 percent off? You might come home and proudly tell your friends, “I saved $75!”

No, you didn’t.

You spent $25, and avoided paying full price on a $100 item.

Unless you took that extra $75 and marched it right over to your savings account, you did not actually save $75.

Continue to seek out those great deals, but remember: Saving money generally doesn’t involve spending it first.

* * *

Next, we head to Northern Cheapskate, where Christiana discusses credit/debit card surcharges at gas stations and convenience stores.

At first, you might be mad because you wanted to use your rewards credit card to earn 1 or 2 or 5 percent cash back on your purchase. The cashier rings up your purchase, and tells you that there will be a $0.50 (or whatever) surcharge if you decide to use a credit or debit card.

Stink! It makes smaller purchases totally not worth it.

But wait a minute. By the store charging a fee for people who choose to use plastic or giving a “pay in cash” discount, they could actually be keeping their costs low for everyone.

Merchants who accept credit cards pay a fee to the credit card companies. It can range from 1.5 to 5 percent of the total purchase, according to this site. So every time someone buys a $1.50 bottle of Coke at their store and pays with plastic, the merchant could be saddled with a $0.02 to $0.08 fee from the credit card company. Doesn’t sound like much, but when you consider most non-gasoline purchases at convenience stations, the totals are usually low. These pennies will certainly add up.

It makes sense for a merchant to want to recoup these costs. One way they can go about it is to charge a surcharge, or “convenience fee” for those who use plastic. Note that this practice is potentially illegal in some states (CA, CO, CT, FL, KS, ME, MA, NY, OK, TX) according to this site.

A retailer can either raise prices of its goods to try to recoup these costs, or it can offer incentives for people who use cash.

Christina linked to a story on CNN.com that states merchants are hit with higher fees for cash-back rewards cards, and lower fees for debit.

Perhaps that’s why the Aldi grocery chain accepts debit but not credit–to keep costs low.

While I really prefer using my debit card instead of cash, maybe I should reconsider the convenience of the card and use cash. Maybe it would be for the greater good. At the very least, it would be one way to stick it to the credit card companies. Hmm, I like that idea!

And for people who are excited about earning cash back on a credit card?

Realize that while you might be getting 3 percent of your purchase back, you could also be paying a surcharge upfront. And, if enough people use those cash back rewards cards, then expect retailers to counter it by raising prices across the board. Kind of negates the cash back incentive, doesn’t it?



15 Responses to “2 things: ‘Saving’ money & merchant fees”

  1. Credit card fees are exactly why Aldi and Costco (and potentially other places, but those are the two I shopped at last night…) don’t accept credit cards. As a bonus, it forces consumers to only spend what they have in-hand, and not rack up debt.

    We try to use cash as a budgeting tool- when the cash is gone, the budget is exhausted, and we know to stop spending.

    And, I totally agree on the saving-vs-spending point of view. I have the hardest time with my mom & sister, who come home & say “Don’t you just love this dress?! I got it for $15 today! Marked down from $60! I saved $45!” I say “No, you spent $15 needlessly, because you didn’t need the dress” and then they walk away annoyed with me. Kohl’s seems to be the top culprit for conversations like this.

    Joanna’s last blog post..Mystery Harvest Contest

  2. Wow, I’ve never truly thought about that. I’m definetely one of those people who say “Ohh I saved $50.00 because my coat was 50% off!” but never actually put that 50 into the savings.

    I’m going to have to start reconsidering what I purchase and what I do with what I didn’t have to spend on the purchase at full price.

  3. I totally agree with the “saving” money article… If you’re buying something you don’t need, it isn’t saving you any money!

    As for the credit card/debit thing… I don’t think I would be comfortable carrying large amounts of cash with me… since I only go to town a couple of times a week, my shopping trips are usually on the larger side… add in a tank of gas, and now I would have to carry quite a bit of cash…

    I guess I’m kind of “darned if I do, darned if I don’t” when it comes to using my debit/credit card.

    Christina’s last blog post..Five Unfrugal Things I Do

  4. “surcharges” for using credit cards are also generally forbidden by the merchant’s contract with the credit card company and can potentially get them into significant trouble. However, the concept of “cash discounts” is protected legally (at least last time I checked). Just FYI.

  5. Before becoming a SAHM, I worked for the devil… umm… I mean the largest credit card company in the US.

    Quick explanation. There are FOUR parties in involved. Merchant(point of sale), processor, individual credit card companies, and Visa/MC.
    Anyway, charging fees is illegal according to the processors (i.e. Checkfree, etc) contract with Visa and Mastercard (not the credit card company itself, Visa and MC are separate entities). Often the merchants get away with charging these fees because Visa and Mastercard do not follow up.

    However, if a point of sale is found in violation of this rule, the processor is required to cancel their contract.

  6. I’ve never paid any kind of fee on my 1% cashback credit card, and I’ve had it nearly 2 years. I always thought that the merchant allowed for people like me by making the interest rates higher.

    Perhaps it’s just my logic, but I thought that the CC merchant charged the store a flat fee for credit card purchases. I didn’t think the retailer had any say about whether it made any difference whether it was a cashback card or not.

    Solomon’s last blog post..Things I’m Grateful For on Monday 23 June

  7. I agree with Solomon. I have found that credit card companies that offer cashback or other rewards also tend to have higher interest rates… and I think that’s how they like to re-coup their money.

    I also tend to think that prices in stores will rise and always continue to rise no matter what we do. So I’ll stick to using my rewards card, racking in lots of free gift cards, and paying off the balance each month so I never incur any interest charges.

  8. TANSTAAFL (There Ain’t No Such Thing As A Free Lunch). If a credit card company is offering cash back for using their card, everybody is paying for it somehow.

    Either the interest rate is higher, or the processing fee is a higher percentage (which means the retailer raises their prices) or they get you some other way.

    That doesn’t mean you shouldn’t take advantage of their offer (after all, you’ll still be paying the higher price or interest rate or whatever), but you just need to be aware.

    These companies aren’t altruistic, they’re just looking for newer and more effective ways of maximizing profits.

    Shevy’s last blog post..If I Blog It, It Will Come?

  9. And small business owners will LOVE you if you pay with cash. :) Those credit card fees just kill me. I am not big enough to negotiate lower rates but taking credit cards is too important to not accept them. While customers over the web can’t pay cash when I do shows in person cash customers are my favorite. =D

    And yes…I get killed with those special program cards. I once made a $50 sale and my fees for the ONE transaction were over $40!!!!!!!!!!! OMG…I was so mad. And I switched my merchant account so it wouldn’t happen again. But oh boy it was a shock.

    Plus using cash makes people really think about what they are buying. I know it does with me. =)

    castocreations’s last blog post..I’m an Old Fart

  10. Great point about “saving” money. I see it as saving if you’d budgeted for the item. But anything else is just (hopefully) spending less.

  11. The only way I’ve seen merchants try to circumvent this in my neck of the woods is to require a minimum amount purchase amount. Most of the times, it’s $10 dollars.

    The math teacher in my always asks why, and the response is that the fees kill them. I can understand the per transaction fee but sometimes the math of the percentage’s is wonky.

    For things like gas, where it’s marked up 10 cents or so no matter the price, it makes sense to no longer accept credit. The more the gas goes up, the less they make. I know it’s a big deal nowadays because some stations are losing money based on the processors fees.

    A’s last blog post..Back Home (in the mass humidity)

  12. Many, many times I’ve thought about using coupons and putting the “amount saved” listed on the bottom of the receipt into a savings account. Then I get sick of fussing with coupons….lol…. I do save up change. Once the can is full it’s about $90. Since we ONLY buy from Clearance [very, very rarely merely on sale and almost never just off the rack] I don’t worry about that one–we buy very little right now!

    I want to add how your Emergency Fund “meter” has inspired me to start building my fund [again]. The economy is really telling us to be frugal! Thanks for the encouragement!

    Lisa’s last blog post..What I’ve been reading

  13. I CAN say that I save money when I buy something on sale because my money is in an interest bearing account. I have all my money in ING, most in the savings and some in the interest bearing checking account.

    I use (cash back) credit cards to buy things and then send the money from the interest bearing account to pay for the purchase before any interest comes due.

    I don’t have to ‘go put the money’ I ’save’ from a reduced purchase in the bank because it is already in the bank earning interest. If the item is on sale then the difference is already in my savings account because then I would just transfer the smaller amount to go as a payment.

    What do you say to that? :-)

    lulugal11’s last blog post..Looking For Guest Posts

  14. There is a circumstance in which you could say you “saved” the money you did not spend when an item was on sale.

    If you are very disciplined about keeping and following a written budget, and you purchase an item at a price less than you budgeted for it, then you have the difference remaining in that budget category. Actually, strict budgeting is probably the only way someone could successfully save the money discounted from a sale item.

    Ginkgo100’s last blog post..The science behind renewable petroleum

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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