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Tuesday, 7 February 2017

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High interest and bankruptcy[edit]

Low introductory credit card rates are limited to a fixed term, usually between 6 and 12 months, after which a higher rate is charged. As all credit cards charge fees and interest, some customers become so indebted to their credit card provider that they are driven to bankruptcy. Some credit cards often levy a rate of 20 to 30 percent after a payment is missed.[36] In other cases, a fixed charge is levied without change to the interest rate. In some cases universal default may apply: the high default rate is applied to a card in good standing by missing a payment on an unrelated account from the same provider. This can lead to a snowball effect in which the consumer is drowned by unexpectedly high interest rates. Further, most card holder agreements enable the issuer to arbitrarily raise the interest rate for any reason they see fit. First Premier Bank at one point offered a credit card with a 79.9% interest rate;[37] however, they discontinued this card in February 2011 because of persistent defaults.[38]
Complex fee structures in the credit card industry limit customers' ability to comparison shop, help ensure that the industry is not price-competitive and help maximize industry profits.[39]
Research shows that a substantial fraction of consumers (about 40 percent) choose a sub-optimal credit card agreement, with some incurring hundreds of dollars of avoidable interest costs.[40]

Weakens self regulation[edit]

Several studies have shown that consumers are likely to spend more money when they pay by credit card. Researchers suggest that when people pay using credit cards, they do not experience the abstract pain of payment.[41] Furthermore, researchers have found that using credit cards can increase consumption of unhealthy food.[42]

Detriments to society[edit]

Inflated pricing for all consumers[edit]

Merchants that accept credit cards must pay interchange fees and discount fees on all credit-card transactions.[43][44] In some cases merchants are barred by their credit agreements from passing these fees directly to credit card customers, or from setting a minimum transaction amount (no longer prohibited in the United States, United Kingdom or Australia).[45] The result is that merchants are induced to charge all customers (including those who do not use credit cards) higher prices to cover the fees on credit card transactions.[44] The inducement can be strong because the merchant's fee is a percentage of the sale price, which has a disproportionate effect on the profitability of businesses that have predominantly credit card transactions, unless compensated for by raising prices generally. In the United States in 2008 credit card companies collected a total of $48 billion in interchange fees, or an average of $427 per family, with an average fee rate of about 2% per transaction.[44]

Benefits to merchants[edit]


An example of street markets accepting credit cards. Most simply display the acceptance marks (stylized logos, shown in the upper-left corner of the sign) of all the cards they accept.
For merchants, a credit card transaction is often more secure than other forms of payment, such as cheques, because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on the credit card payment (except for legitimate disputes, which are discussed below, and can result in charges back to the merchant). In most cases, cards are even more secure than cash, because they discourage theft by the merchant's employees and reduce the amount of cash on the premises. Finally, credit cards reduce the back office expense of processing checks/cash and transporting them to the bank.
Prior to credit cards, each merchant had to evaluate each customer's credit history before extending credit. That task is now performed by the banks which assume the credit risk. Credit cards can also aid in securing a sale, especially if the customer does not have enough cash on his or her person or checking account. Extra turnover is generated by the fact that the customer can purchase goods and/or services immediately and is less inhibited by the amount of cash in his or her pocket and the immediate state of his or her bank balance. Much of merchants' marketing is based on this immediacy.
For each purchase, the bank charges the merchant a commission (discount fee) for this service and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee (interchange rate).

Costs to merchants[edit]

Merchants are charged several fees for accepting credit cards. The merchant is usually charged a commission of around 1 to 4 percent of the value of each transaction paid for by credit card.[46] The merchant may also pay a variable charge, called a merchant discount rate, for each transaction.[43] In some instances of very low-value transactions, use of credit cards will significantly reduce the profit margin or cause the merchant to lose money on the transaction. Merchants with very low average transaction prices or very high average transaction prices are more averse to accepting credit cards. In some cases merchants may charge users a "credit card supplement" (or surcharge), either a fixed amount or a percentage, for payment by credit card.[47] This practice was prohibited by most credit card contracts in the United States until 2013, when a major settlement between merchants and credit card companies allowed merchants to levy surcharges. Most retailers have not started using credit card surcharges, however, for fear of losing customers.[48] Surcharging is actually illegal in 10 states.[46]
Merchants in the United States have been fighting what they consider to be unfairly high fees charged by credit card companies in a series of lawsuits that started in 2005. Merchants charged that the two main credit card processing companies, MasterCard and Visa, used their monopoly power to levy excessive fees in a class-action lawsuit involving the National Retail Federation and major retailers such as Wal-Mart. In December 2013, a federal judge approved a $5.7 billion settlement in the case that offered payouts to merchants who had paid credit card fees, the largest antitrust settlement in U.S. history. Some large retailers, such as Wal-Mart and Amazon, chose to not participate in this settlement, however, and have continued their legal fight against the credit card companies.[48]
Merchants are also required to lease or purchase processing equipment, in some cases this equipment is provided free of charge by the processor. Merchants must also satisfy data security compliance standards which are highly technical and complicated. In many cases, there is a delay of several days before funds are deposited into a merchant's bank account. Because credit card fee structures are very complicated, smaller merchants are at a disadvantage to analyze and predict fees.
Finally, merchants assume the risk of chargebacks by consumers.


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