The True Cost of Credit

My former student Sean Harper has put together a nifty little web site, truecostofcredit.com, that allows you to see how much merchants are charged when you use your credit card.

I was surprised at how high the fees were. For instance, in this example of a Mastercard, when you buy a $1.50 pack of gum at a convenience store, the credit-card company gets 28 cents. Even on big-ticket items like airline tickets, the credit-card company collects nearly 3 percent.

This is not to say that there is anything wrong with those fees. I presume that the issuing banks can choose their own fees (within reason), and that there is more or less free entry — which suggests that the industry should be pretty competitive. Merchants accept credit cards, which implies that the benefits of doing so outweigh the costs.

Nonetheless, credit-card fees turn out to be a big cost of being a retailer. According to the numbers at the web site, if everyone used a credit card when shopping at Best Buy, credit-card companies would collect roughly $1 billion a year in fees from Best Buy.

(See also a nice post on Consumerist.com about truecostofcredit.com.)