Credit Cards in the United States: Costs to Consumers

About the costs to consumers of using credit cards in the United States, the interest rates, fees, and payments associated with them.

COST: NOTHING IS REALLY FREE

As Americans continue to charge billions of dollars on credit cards, credit-card issuers are counting their profits and projecting future increases. With over 81 million consumers on "extended rotating credit," it is necessary to look at the cost of the credit card.

First, the "free cards," which are received without charge to consumers who meet qualification standards. These cards are issued by department stores, airlines, oil companies, and banks. Free cards grant a 25-30-day "grace period" after receipt of bill for customers to pay without finance charges. After the grace period, interest accumulates usually at the rate of 1 1/2% per month, or 18% a year (on balances under $500). By paying interest, consumers are allowed to take advantage of what credit-card advertising calls "extended payment."

Second are the travel and entertainment cards (American Express, Carte Blanche, Diners Club). These do not usually offer the option of extending payment on a revolving account in return for interest on the unpaid balance. Instead they charge a fixed initiation fee, usually $20, before cards are issued. This fee is intended to cover paper work, and in the case of American Express, it also includes a subscription to Travel and Leisure magazine.

In addition, banks also profit from "discounting income" from the merchants who use their credit-card services. For example: Joe cannot afford to extend credit to the customers of his general store. He contacts a bank and arranges for the bank to sponsor the credit plan. Joe then puts the bank's decal on the window of his store, after paying an initiation fee, renting an imprinter (machine used to print charge slips), and agreeing to keep a "demand deposit account" with the bank. When Joe turns over the customer charge slips to the bank, he does not get "face value" for them. Instead, he receives the amount left after discounting by the bank at rates of between 2.5% and 7%. Although Joe benefits because his money is not tied up in credit transactions, he may have to "hike up" the selling price of his goods to cover what he must pay the bank.

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