And you pay 3% on every transaction to get 1.5% back. Seems like a pretty bad deal. Or do you really think businesses just gives you 3% for free on every purchase rather than raising prices on everything to make up for that 3% loss? A raw 3% of revenue is huge, there is no way businesses can take that without raising prices as consumer sales is pretty efficient and has small margins already. So they raise prices for everyone or they raise prices for people paying for cards, but either way you are paying more than you get back for that 1.5%.

> A raw 3% of revenue is huge

The business doesn't lose 3 percent of revenue, because it also saves money not dealing with cash:

- eliminates cash theft - always a chronic problem for business.

- reduces costs of transporting/dealing with cash

- improves bookkeeping and paper work

and it gains revenue by dealing with people who don't use cash. A large number of customers don't make routine purchases with cash, and these are higher income customers.

So the choice isn't "pay 3% on X or don't pay 3% of X" The choice is "pay 3% on X" or "don't pay 3% on .9X".

> The business doesn't lose 3 percent of revenue, because it also saves money not dealing with cash:

Debit cards circumvents the need for cash as well and are much cheaper. Everyone uses debit cards where I live, cash is very rare so companies doesn't need to deal with it much.

So the difference is really just a straight 3% vs 0.15% with no other consequences.

I think 3% is an exaggeration. And in fact, you can get 2% cash back. I don't think there's very much being charged when all is said and done.

This seems to show the fees can be considerably less than 3%, although PayPal or Square will charge nearly that:

https://www.fool.com/the-ascent/research/average-credit-card...

https://www.mastercard.us/en-us/business/overview/support/me...

That's an interesting point. I'm not aware of any POS payment processor used by business that accepts debit cards but not credit cards. Not sure why that is.

I think it is mostly that it confuses buyers and that confusion costs more than credit cards costs. You'd need regulations to get around this.

Except for a handful of businesses like cash stations, almost nobody raises prices for credit card users in the US (in fact I think their merchant agreements forbid this). So if I use cash I'm the sucker subsidizing everyone else's rewards points.

You're looking at it the wrong way. It's just a shell game to get around truth-in-lending laws.

Using a credit card is borrowing money. Interest rates have to be disclosed.

So the fees plus the grace period are a way of making it look like typical card users are not paying a lot of interest.

People getting cash back are actually paying low interest rates, because the market dictates it.

If the fees were prohibited, then not much of substance would change, except the numbers would all be higher.

Well, I live in Europe, use debit and the transaction costs are 0.15% with no hidden fees anywhere in the system. And that is the norm, I don't know of anyone who uses credit cards here. (Although we call debit cards issued by Visa or Mastercard credit cards since Americans call those brands of cards credit cards, but people who use them don't have any credit, your account gets deducted instantly and you can't buy if there is no money left).

I'm not sure why Americans say that credit cards with 3% fees would be better than this system, and make fun of Europeans for not wanting to use credit cards. To me it just feels like US finance industry tricked everyone into choosing the more expensive product since they hid the costs of it from the person making the choice. But when people has to pay the real costs of credit cards then basically nobody wants one.

> But when people has to pay the real costs of credit cards then basically nobody wants one.

I believe there is an opportunity cost for not using a credit card in US: you don't build your credit history. This might leave you disadvantaged in the future because... the finance industry (as an extension, the society) is structured in a way that you must have a good credit history.

I interpret your tone as suggesting the justification is circular and arbitrary, that finance doesn't serve a human need.

People can take loans all over the world, USA is the only country I'm aware of where you need to do stuff like use a credit card to take a loan. Don't you think it is suspicious that the finance market decided that the only way to get a loan is to first buy a lot of expensive finance products? It is kind of like how politicians are mostly lawyers, and they decided that the only way to ensure your rights is to pay a ton of money to a lawyer, is that just a coincidence? I don't think so, to me both of those seems very corrupt.

I didn't mean it in a negative way. I've never lived is US so what do I know. Just suggesting a reason for why people might want credit cards.

But you have a point with circularity and arbitrarity. Credit is basically about trust, and the thing with trust is that you already need trust to build more trust. When do you start trusting people to take loans is just as arbitrary as when a person attains the age of majority.

>I'm not sure why Americans say that credit cards with 3% fees would be better than this system

I don't know if you're trying to characterize my remarks above, but if so, this is inapposite.

I claimed the fees were a shell game, which implies having them isn't significantly better or worse.

If they weren't hidden, it would be clearer how much interest was being paid, but people who pay a low rate would probably still want to borrow.

I do feel like there is more fraud protection with credit cards as they currently exist, which is not to say that is specifically tied to a detail like fees not being regulated.

It seems all around logical and reasonable to me to want to pay a few basis points more in fees in exchange for fraud being someone else's problem. It's not just a fee for service, but also aligning incentives.

If your bank can take the position that fraud is (virtually) impossible, that's not just inconvenient when you happen to be an unlucky victim, but it minimizes their motivation to prevent anything that contributes to it.

People will go toward the option the system points them to, and in the US you don't pay extra fees for credit cards and have the best fraud protection with them. So why wouldn't you use it? Sure, I guess I might think twice if I had to pay a surcharge with every card purchase. But I don't, so why should I behave as though I did?

I’m not personally—and I may or may not pay cash if someone charges extra for credit. (But handling cash isn’t free.)

Yes, someone is paying for my 2% cash back card but it’s still a net benefit to me.

People misinterpret this as some sort of tragedy of the commons, but I think that's begging the question.

We (anyone/anywhere) could pass a law that said no more fees, and the credit card companies could instantly raise interest rates and end grace periods to compensate exactly. And then instead of cash back, they would have cards with much lower rates.

I don't see that anybody would be better or worse off, to first order. The difference is framing, and psychological response.

People look at stuff totally differently when it's divided into different buckets.

> the credit card companies could instantly raise interest rates and end grace periods to compensate exactly

I don't think you can simplify it that much. If you end grace periods, the people that currently don't pay interest will suddenly be charged huge amounts. If you drastically lower the interest rates to make their costs match the old model, then other people that pay the card off slower will suddenly be paying much less than before.

It's easy enough to ban fees charged to the business, and force them to be charged to the customer, to make pricing more transparent and remove the silliness around rewards. But trying to replace fees with interest rates doesn't work, unless you set up some crazy nonlinear '''interest rate''' calculation.

Yes. Grace periods are basically the only way credit cards work for business users among others. Four and five figure balances—paid off on time at the end of the month—are how a lot of people routinely use credit cards.

> the people that currently don't pay interest will suddenly be charged huge amounts

They will be charged the same amount if the interest rates are set accordingly, it will just be explicit.

>other people that pay the card off slower will suddenly be paying much less than before

You say that as if their rate must remain, if not fixed, in a fixed ratio with others. I don't see why.

>trying to replace fees with interest rates doesn't work

You might be right. But I don't see why, and I think that if I can guess a little, people in the industry know much more and are smarter.

Just as a nice round example number, let's say someone is effectively paying a 1% fee at time of purchase.

How do you turn that into an interest rate? Stuff at the start of the month and stuff at the end of the month are going to pay interest for different lengths of time. What if they change the timing of purchases?

Let's say you pick an average you're satisfied with. Okay, now you've calculated a rate you need to charge for the first month to match the old fee. You have to charge this specific percentage for the first month to make the math work out. ...but what if that percentage doesn't match the percentage you used to charge after the grace period?

One way to resolve this is to charge a first-month interest rate and a subsequent-months interest rate. But that's not really an "interest rate" anymore, is it? You're just obfuscating the fee, and the goal of this exercise was to make things more transparent.

The other way to resolve this is to have the "interest rate" change every single month, based on the timings of when you did all your purchases. This is just taking the old system and hiding it inside a black box, and that black box spits out an "interest rate" each month.

Unless I'm grossly missing something, there's no way to use just an interest rate to emulate a system of upfront fee plus interest rate. Do you have a suggestion of how to make the math work? Tell me what interest rate could replace "2% fee, 1 billing cycle grace period, 16% interest afterwards". Also tell me what interest rate could replace "0.5% fee, 1 billing cycle grace period, 16% interest afterwards".

>that's not really an "interest rate" anymore, is it?

If a grace period is ok now, why would it not be ok?

But if there has to be one rate per customer, sure, fine, why can't it be adjusted based on their minimum balance over time?

>Tell me what interest rate could replace "2% fee, 1 billing cycle grace period, 16% interest afterwards"

Option 1 would be to add (for the sake of an example) 24%, keep a sort of grace period, classify people in two groups.

  People who were eligible for 2% cash back now pay 0% during the grace period, 16% after.

  People who were not eligible for cash back now pay 24% during the grace period, 40% after.

Not exact numbers, just an outline.

Option 2, if they want to get rid of grace periods, they just separate people who usually pay off their balance monthly and those who usually don't and charge them the different rates.

> If a grace period is ok now, why would it not be ok?

Grace periods are fine! But you said get rid of them, and I was pointing out that you can't simplify the math that much. It ends up being a mess with a hidden grace period inside a bunch of confusing math, rather than an understandable and relatively stable interest rate.

If you're happy to keep grace periods, great, let's do that. And I'll skip the rest of the post because it's not worth fussing over in that case.

Not sure I understand that. I don’t really care about the interest rates under the current regime but of course I would care about lack of grace periods, cash back, and other card benefits.