Credit Card Base

Most of us don’t know the true cost of credit, we simply pay attention to what we’re paying in fees and finance charges.

But the cost of goods and services increases as a result of credit card use, as merchants need to pay fees to banks, credit card issuers, and other companies for the infrastructure, equipment, and convenience.

These merchant and interchange fees vary based on the type of transaction, merchant, and card issuer involved.

Visa charges an average of about 1.80% per transaction, while American Express charges around 2.50%, though smaller retailers typically pay between 3.25% – 3.75%.

This is why you’ll often find that not all small merchants accept American Express, as they don’t want to pay the extra fees (Amex also tends to side with the consumer, another drawback for merchants).

If the merchant has a special deal in place with a card issuer, perhaps based on a volume or exclusivity agreement, they’ll be able to secure lower pricing.

Take a look at these figures below, provided by TrueCostofCredit.com to get a better understanding of what credit really costs:

But even if you elect to pay with cash, more often than not the price already reflects the option to pay with plastic, unless you work out a deal specifically with the merchant.

The use of credit is already priced in, so it’s wise to get your hands on a rewards credit card, like the American Express Blue Cash, which offers cash rebates of up to 1.25%  – 5% on all purchases.

Tip: Watch out for merchants that try to pass the “transaction fee” onto you directly.

Your income may become a more important factor in determining whether you’ll be approved for a credit card, according to a post in the WSJ.

The paper said beginning in February, credit card companies will be required (Credit Card Bill of Rights) to consider an applicant’s income or assets/current debt before extending credit to ensure consumers have the ability to repay.

In preparing for the change, the credit bureaus have already gotten in on the income estimation business, with Experian reportedly nailing down income to the nearest thousand.

They came up with their estimates by matching credit reports with wages, interest, and investment income, along with total credit lines and related payments.

These income estimates will help credit card issuers approve or decline applicants, and may also be utilized to increase or decrease an existing credit line.

In the past, credit card issuers simply asked consumers to enter their gross annual income in a box on the application form, but soon you could be required to provide pay stubs, tax returns, or be asked to fill out a form 4506, which allows the IRS to release your tax filings to lenders (so no fudging the numbers).

What the changes really communicate is that credit scoring has proven to be unreliable, at least as a standalone determinant of capacity to repay debts.

Of course, the income estimates are just ballpark figures when it comes down it, which is why the credit bureaus’ contracts prohibit card issuers from turning down customers based solely on the information.

See: why credit card regulations are worthless.

We sure hope so!  That’s what Washington Post columnist Michelle Singletary has dubbed the coming year in her latest article about credit card and consumer lending reform.

Her article, which you can read by clicking here, outlines some of the most important changes coming in 2010 and includes dates when the new rules will become active.  (Note: when clicking the link, make sure you’re done reading the first page before you move on to the next, as you’ll be asked to register if you try to click back to page 1.)

The key dates to watch are as follows: