We all pay for credit cards, however we use them
The Financial Times has been covering moves afoot in the credit card industry this week.
This got us wondering: is it obvious how we pay to use credit cards?
First off: interest on the balance. If you buy something with your card, and then don’t pay off the card balance in full, you’ll have interest added to your balance. And once you start incurring interest on a credit card you’ll also be charged interest on any purchases you make after that. You must then clear your whole balance to stop interest being charged. Interest on UK credit cards tends to be around 20% to 30% (APR), which is a lot. So: paying the card balance in full each month is pretty sensible.
Some cards offer a 0% interest balance transfer period: these allow you to transfer a balance from another credit card, and you won't incur interest on that balance for a set time; anywhere up to 3 years. You ideally use this set time to pay off the balance you transferred in. You can use the card to buy things in this time but will usually pay interest on those, and it’s obviously possible you can build up an even bigger balance. Mostly you pay a balance transfer fee when you transfer in, perhaps 3% of the balance: so £30 on a £1000 balance.
So, if you’re paying interest, the credit card company makes some money out of you. But what if you are paying off your card balance in full, or your card is still in a 0% balance transfer period?
Well, some cards will have a yearly charge - a fixed amount (like £100) - which is added to your balance once a year. These tend to be on cards which have rewards schemes, like air miles. Often this yearly charge does not incur interest.
Also, all cards have one-off charges, such as:
- Using your card abroad for purchases: there might be a 3% currency fee, so £30 for every £1000 you spend in a foreign currency. Some specialist currency cards are cheaper.
- Using your card to withdraw cash at a cash machine. There will be a charge (perhaps 3% of the cash amount) and you’ll be charged interest immediately.
- Late payment charges which might be around £12.
- Charges for going over your credit limit which could also be around £12.
We all pay for card fees
The other way we (and that’s all of us) pay for credit cards is due to merchant fees. Each time you buy something, your merchant (i.e. the person you’re paying) must pay a fee to a card processing company. That might be 0.8% of the price (£8 fee for every £1000 of price). Most of the time, the prices we pay in store and online are a little higher to allow for card merchant fees, as we don’t pay any extra for using a card.
the prices we pay in store and online are a little higher to allow for card merchant fees
However: sometimes you’re still asked to pay a card surcharge. You’ll have seen surcharges if you’ve bought flights online, where the company you’re buying from charged you a fee to pay by credit or debit card. Many merchants have been surcharging a lot more than the merchant fees they have to pay out, even though this is not legal. EU-wide regulation will ban surcharges next year, and so from 13th January 2018, UK merchants (whether they’re an online shop or a water company) will have to charge you the same price whether you use cash, credit or debit card to pay.
Although your card provider doesn’t get all of the merchant fee (some is kept by the processing companies), they still make enough from these ('interchange') fees to make profits on customers who use cards only to pay for stuff, and then clear the balance each month.
People who mainly use cash shouldn’t feel too hard done by: handling cash also costs shops money. Just depositing cash at a bank might be £4 for every £1000 of cash, so not very different from the cost of a customer paying with a debit card.
The future, card free?
But anyway, the future is cardless*, right? Digital wallets like Android/Apple/Amazon Pay will be more and more popular, and payments will be freed up by new European payment services regulation. Maybe. The wallets rely (for now) on your having a credit or debit card attached to them. But this (possible) cardless future is part of the reason for the battle to win customers: if you have customers on your card (or digital wallet), then you have your customers’ data. And when a company has data on us, it has something which is of value.
Even if physical cards become less common, we will still be paying for the use of credit on things we buy: whether that's through interest or charges, through fees included in the prices we pay, or through giving data on our spending and habits to a payment provider.
* Fiona does not welcome this advance, exactly, as it will likely rely on a mobile phone or smartwatch battery which remains charged. The worst an actual card can do is be in the wrong bag when you go to rummage for it.
Like this? Further Reading:
Further reading: Do credit card companies want you to stop paying off your balance in full so they can make a profit from you? Not particularly, found the Financial Conduct Authority.
Further further reading: In 2015 the EU capped debit and credit card interchange fees (the bit of the merchant fee your card provider gets). How did it affect prices and retailers?