Your Credit Card Will Cost You $400 in Fees This Year



Credit card fees eat up a huge chunk of small business profits. Photo: Shutterstock

Like they say, there’s no such thing as a free lunch.

Even if you pay off your balance every month and get a bunch of cool rewards, your credit card will still cost you an arm and a leg this year.

Alex Mayyasi over at Priceonomics has a great primer on the history of credit cards, how they work and how credit card fees amount to a tax on the American economy.

The entire piece is worth checking out, but here are some highlights:

It doesn’t matter if you don’t use a credit card. You’re still paying the credit card companies.

Even if you pay with cash at store that accepts credit cards, you’re essentially subsidizing plastic users. That’s because all the fees are on the merchant’s side. Those costs are already embedded into the final item price. On average, every American pays a $400 fee to credit card companies every year, all things considered.

Many businesses pay more in credit card fees than they make in profit.

A 2% fee might not seem like much. But remember that profit margins for many common businesses are razor thin. Mayyasi explains:

Those fees infuriate store owners and merchants. Some industries only make a few cents in profit from every dollar you spend. The profit margin of the average convenience store, gas station, or supermarket, for example, is under 2%. Credit card fees are 2% or more of nearly pure profit. The results can be absurd: banks and credit card issuers making more from a restaurant’s burgers, a bookstores books, or a corner store’s groceries than the store owners and employees.

Mayyasi mentions the genesis story of Coinbase, which was started by a guy who left Airbnb to start a digital currency company when he saw that half their profits went toward credit card fees.

The first credit cards were distributed like AOL CDs.

To overcome the chicken-egg problem, banks airdropped millions of credit cards on unsuspecting households. By the time the practice was outlawed in 1970, banks had airdropped 100 million cards in total.

The first credit card was also a huge loser for the banks.

Apparently, early adopters didn’t see the point in paying off their balance.

Credit card companies have monopoly power and so they get to set their price.

Overall costs have declined over the years but fees have not and remain steady at around 2%. In Europe, the government caps transaction fees at 0.3%.

Credit cards are insecure by design.

Every time you pay for dinner at a restaurant with your credit card, you’re essentially giving the waiter total access to your account. As Mayyasi explains, “It’s like if someone could steal your house by knowing the address.”

Read the Priceonomics report: How Credit Cards Tax America