Thursday, July 9, 2009

How Credit Cards Work, Part 3

So, you pay your credit card bill promptly every month. You have no annual fee. What use are you to the banks?

Believe it or not, even if you always pay in full, I was shocked to discover the bank still makes money off of you. BECAUSE, for every charge that you make, the bank takes 2-3% of the amount charged from the seller. This is the cost for the stores of the doing credit card business, if you will, the charge the banks demand for the service. And top of that, banks also charge a transaction fee, a flat rate of 30 cents or more. If you ever wondered why some stores demand a minimum charge of $10-20 in order for a buyer to use a credit card, this is the reason. Maybe it's also the reason that candy bars are so darn expensive at gas stations -- if they only charge 60 cents, bank costs gobble more than half their fee.

A cheap Snickers may satisfy you...but probably not the BP.

So, that's how credit cards work. As I said at the beginning, there's a lot of talk out there at this point that banks are beginning a variety of strategies to try and milk more money from them, ranging from the restoration of annual fees to the truly outrageous moves of changing the dates the bills are due without due notice or changing the interest rates dramatically, and doing it all right now so as to get in before the new credit card reform law goes into effect. The New York Times noted in an article last week that the banks being given the most in the bailout are, of course, the ones demanding the highest fees.

A last thing -- you know how when you sign in for a credit card, the information sheets they give you are so complicated and convoluted, they make it pretty near impossible to actually know what the fees are? Well, a number of graphic designers have suggested a simple form very similar to a nutrition label. The full article, which is very short and worth reading, is here.

And here's the label they suggest (Click to make it bigger):

Definitely a step in the right direction.

And for those frustrated with these and other things some of the banks are doing these days, may I offer a little Friday rage-catharsis.

Star Wars Lightsaber: 3 million credits.
Unlimited Power: Your immortal soul.
A 30 second clip on YouTube: Priceless.

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