How do Credit Cards work?

Let’s say you go to a grocery store and want to buy an orange.  The price for the orange should be .95 cents for cash buyers and 1 dollar for credit card buyers.  When was the last time you have seen 2 different prices on the label at grocery store.  Chances are you haven’t and this is because long ago the grocery store has rolled the credit card prices into the standard price.  If you pay with credit, they will still make the same profit margin, however if you pay with cash, you are giving them a few extra cents on the dollar for the same purchase.

Typically credit card companies charge a 1.5-3.5% fee on each credit card transaction a vendor accepts.  A lot of vendors roll this fee into their pricing structure.  This isn't obvious if there is no sign saying “3% credit card fee” near the register or if there aren’t 2 prices listed for items (1 price for cash and a separate slightly higher price for cards).

Where does that 1-3% go?  As with any business the goal is to make money.  These fees are how credit card companies make their money. In 2023 these fees accounted for $135.75 Billion dollars.  Are these companies greedy? Perhaps.  US Senate Minority Whip Dick Durbin (D-IL), U.S. Senators Roger Marshall, M.D. (R-KS) and Peter Welch (D-VT), amongst others are seeking to pass legislation to reduce or remove these fees.  This in theory is a terrific idea as it should put money back in the pockets of hard-working Americans.  In practice this simply moves wealth from the ultra-rich to the super rich.  These companies that were perfectly fine with just rolling the credit card fees into their pricing structure will likely be just as happy to leave the prices as is without having to pay the credit card fees.  That is an easy 1.5-3.5% profit margin for them without having to make any changes.

You may be asking yourself “Why are these corporations always taking money from me and never giving anything back?”  I am glad you asked.  The credit card companies realize they are making quite a bit of profit and they pass that back to the working-class citizens with credit card points.  There are many credit cards, different point structures, and other points we will detail in later articles.