A guest post by fellow Personal Finance Blogger, Mike -

Back when I was a kid, there was a friend of mine whose family owned a restaurant in town. One day while visiting, I remember hearing the father harp about credit card payments. Was he ranting about the 1-3% surcharge? Nope. He was whining about the fact that he was forced to pay taxes on those transactions (or in other words, he couldn’t break the law and make money under the table with them).

In the years since, the battle over card payments have only grown stronger. You rarely hear a company like McDonald’s, Target, or even a mid-size chain complaining, but rather the mom and pop businesses; independent liquor stores, gas stations, dry cleaners, eateries and the like. Which has naturally led me to wonder – How much of this hoopla is about the actual fees? And how much of the card hating has more to do with small biz owners paying Uncle Sam his fair share?

The argument for small businesses

On one hand, I sympathize with the mom and pops. Keeping a small business out of the red is hard enough as it is, so any fee or expense is a burden. This is especially true for small transactions, whereas the percentage paid for processing is higher. There’s the inquiry fee (say, 12 cents) and then the percentage fee (2% for example). On a $100 purchase that would only be $2.12 (2.12% of the price). However if the customer were just buying a $1.50 bottle of soda, then 2% plus 12 cents = $0.15 (which is a whopping 10% of the purchase price). Sure enough, the industries which are affected by this model the most seem to be those who are most vocal in complaining – the convenience stores, gas stations, and so forth.

Another obstacle for mom and pop businesses is that they have little to no negotiation power. That being said, the wiggle room is not as large as you may think. The card’s issuing bank (e.g. Citi) and the payment network (e.g. MasterCard) get the lion’s share. The portion that can typically be negotiated is the piece of pie that the processing service gets, which is a sliver. So while it’s true big business pay less, the difference might not be as drastic as you think. However the uber-big (think Walmart and Costco) do sometimes have the ability to negotiate the payment network’s cut, too.

Lastly, to say the fees are confusing for a mom and pop would be an understatement. There are multiple risk tiers, which all cost different rates. Take an online retailer, who would probably pay a higher rate than a restaurant where the card is physically swiped. To further complicate matters, different cards have different fees. For example, my business credit cards and Joe’s 2% cash back card are amongst the most expensive to process. All of this can lead to sticker shock each month, when the business owner sees just how much they’re forking over for those card transactions.

The argument for banks

For the pro-credit card camp (which admittedly, I am a part of) there are several aspects which even the naysayers must at least consider.

For starters, credit cards are a service that must be paid for. While it’s true that some people carry a balance and pay interest, the majority of cardholders pay their bill in full every month (Joe and I being two such examples). The fraud protection, insurance benefits, cash back, travel rewards, customer service, printed statements, and other expenses must be paid for somehow, right? Well that’s where those processing fees come in handy.

Secondly, thanks to Senator Durbin, businesses small and large have the ability to now place a minimum spend requirement on debit and credit card purchases (before the payment networks wouldn’t allow that). So that $1.50 soda conundrum can be circumvented by imposing a $10 minimum. Problem solved.

Third, there’s a good reason why you don’t see big business rallying against the card industry. Why? Probably because they’ve discovered that cards encourage spending. A few years ago when McDonald’s was trying to decide whether or not to accept plastic, they ran a pilot program and reportedly found that the average transaction size rose from $4.50 to $7.00 when paying with a card. After the discovery, they rolled out card acceptance nationwide in a hurry. Reportedly there is also a Dunn & Bradstreet study out there which claims a 12-18% increase with credit cards, though I have yet to read it myself. Either way, there is ample evidence to suggest that more will be spent. Is it worth paying 2-3% in fees for your business to rake in significantly higher purchase volume? You be the judge.

The argument for taxes

Last but certainly not least, we come to the taxes. If you’re up for some reading, check out this 30+ page article titled Cash Businesses and Tax Evasion. It was authored by three faculty members from various law schools in California. Nearly 275 interviews were conducted with cash business owners, as well as their tax preparers and bankers. They offer a fascinating insight into how cash payments from customers and to suppliers are used to grossly under-report income. The paper concludes:

ìCash business owners rely on parallel cash economies to under-report receipts and thereby evade income, employment and sales taxes. Many preparers in this sector adopt a “don’t ask, don’t tell” attitude toward their clients reported receipts. A small minority of preparers, however, actively aid in their clients’ evasion. Evasion seems best explained by opportunity, including the low-perceived likelihood of detection and penalty, and by peer norms. The perceived equity of the tax system has less importance, and the complexity of the tax law does not appear to play a significant role.î

While each page is riddled with example after example of how cash is drastically under-reported, the finding for credit card payments are a stark contrast: ìmost interviewees reported that credit card receipts were generally reported as taxable revenue.î

Going back to the industries mentioned above which appear to be most against cards, I find it interesting that they also seem to be the mom and pops who, historically, have largely been cash-based. While I sympathize with the high cost on processing small transactions, I find it ironic that large chain eateries (who are more likely to report all income, regardless of source) seem to feel the complete opposite ñ they love credit cards, even for the small transactions.

So which is it?

So that brings us back to the question, is it really the fees on the bottom line? Or the fact that card payments make tax evasion tough to pull off?

This post was written by Mike, the guy behind Credit Card Forum. Thanks, Mike, you looked at this topic from an angle that never really occurred to me before, very interesting.

written by JOE \\ tags: Credit, credit card, mastercard, visa

Last year, I published a brief article Your Credit Score, in which I described the different components that make up your Fico Score.  Since then, we’ve reviewed Age of Open Credit Lines, Number of Open Accounts, and Credit Utilization.

Today, let’s talk for a moment about on-time payments. This one should be obvious to you. Pay your bills on time. No matter what. When I was young and stupid, I probably had too many cards, chasing one deal or the next, and my utilization may have been pretty high for a time, but the one thing that remained sacred was the on time payment. The snapshot above from my Credit Karma report card shows how even if 1% of your payment history is late, you take quite a hit to your score which can really cost you in the long term.

Disclaimer – I receive no compensation for any reference to Credit Karma, if they ever decide to send me a t-shirt, I’ll disclose it to keep the FCC happy.

written by JOE \\ tags: Credit, credit history, payments

I thought it a good idea to continue the series on your credit score, started with Too Little Debt, and then How Old is Your Credit Card? Today, let’s look at my score (provided by Credit Karma) for total number of accounts.

Well, I got an A, which is cool, even though I’ve canceled a number of accounts and moved on. The 9 sounds about right, a mortgage, home equity line, and 7 different credit cards.  More than anything, I find it interesting and curious that the score basically says “more is better.” Just getting the couple credits cards and one mortgage would keep you at the bottom of this scoring criteria. Hey, don’t shoot me, I’m just the messenger.

How many account do do have? How many are still open?

written by JOE \\ tags: Credit, credit karma, Debt, Finance

In October, 2009, I wrote The Unintended Consequences of CARD, and discussed how any limit on bank fees would result in them looking to replace that lost income elsewhere.

It took some time, but now I read Swipe fees give retailers a windfall of billions at the expense of consumers, which confirmed this trend is just starting. In this case, the story highlights how Wal-Mart lobbied to reduce swipe fees, the fees paid by merchants to tap into the debit card network. This seems to me to be natural, I’d like to pay lower fees for whatever services I get, why shouldn’t merchants do the same? The article’s author is Bill Cheney, president and CEO of the Credit Union National Association. His beef with this, is the credit unions which get this fee will seek to make it up elsewhere, and the consumer won’t see the savings at the register, the retailers will just pocket that money. Unintended consequences in action.

written by JOE \\ tags: debit card, Debt, swipe fee

Last month I posted Too Little Debt, in which I discussed how a zero balance credit card bill is actually a negative to your credit score.

Today, I’d like to offer another aspect of your credit score – the Average Age of Open Credit Lines. Here, longer is better. This is one criteria that I really object to. Think about it, a card issuer decides to raise their rate or annual fee and you decide to get a new card from a different bank. If you had only that one card, you may be dropping your average time from many years right down to zero.

You can see from this chart, a snapshot from Credit Karma, that offers a view of the image of account age on your credit score. So, find a credit card or two with no fee and stick with it. Keep in mind, it’s simple math, if you have a few credit lines, adding a new one will have less impact on average time than if you only had one. You are also far better off canceling a more recent line than one that’s older than your personal average.  How old is your oldest card?

written by JOE \\ tags: Credit, credit karma, Debt, fico

Last year, I wrote Your Credit Score, in which I discussed the factors that go into the Fico Score. One item, representing 30% of your score was credit utilization.  In other words, using $1000 of a  $2000 total credit line was far wore than using $2000 of a $10000 line. Since the amount reported is what’s shown on the bill, regardless of how much you pay or even if you pay in full each month, the bill amount still ripples to your score. So as part of some experimenting, I paid my cards in the last cycle before the bill was cut. Yes, just before.

(Note – you can click to enlarge the image) You see, this was just brilliant. By owing less than 1/2% of my available credit, I managed to go from a potential A to a C for this criteria. Owing zero is exactly as bad as owing 41-60% of your available credit, which in my case would mean $30K+. An A ranges from 1% to 20%, so unless the Janes and I plan to do some real damage, I think I’ll quit this experiment and let the bill come in before I pay it. Lesson learned.

Joe

written by JOE \\ tags: Credit, credit karma, Finance