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Financial Literacy

Financial Literacy

Banks and Stores

Hands down, the pros outweigh the cons for the companies that put out the cards.

• Credit cards are an excellent way for banks and “financial institutions” to earn money.
• They can charge the highest interest rates around.
• Revolving debt is self-perpetuating, especially if the holder only makes the minimum payments due each month.

There are some drawbacks:

• When cardholders default (to default on a loan means to not pay what you’re supposed to pay when you’re supposed to pay it), the bank sometimes just doesn’t get paid back and they have to take that hit.
• In 2010, 11 million adults in America were victims of identity theft/fraud so banks work really hard and spend lots of money to protect people’s information. 

Merchants are the stores, restaurants, and companies that accept credit cards. For merchants, credit cards are a mixed blessing.

• They get paid super-fast.
• Increases likelihood of that a consumer will buy something.
• Customers tend to spend more when using credit cards according to some pretty serious studies like the one done at MIT recently that showed people spend up 100% more when using a credit card.

But, it costs money for a store to accept a credit card. Fred’s Collectible Comics is a new and used comic bookseller. Lots of Fred’s customers—like Elizabeth–use their credit cards.

Who gets the money:

Elizabeth spends… $100.00
Bank that issued the card gets an interchange fee ($2.00)
Fred's bank get a processing fee ($0.50)
Fred gets $97.50

That’s 2½% of the total that Elizabeth paid for her comic books. This comes off the top of Fred’s sale and he has little control over the cost.

And. If Robert buys a collector’s classic comic book online from Fred’s Collectible Comics with his Visa, but the book is a day late arriving, he can ask Visa to give him a charge-back (a reverse charge). And Visa will probably do it…without any input from Fred.

Some merchants, if they’re really big, like Wal-Mart, negotiate processing fees or just offer their own credit card.

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