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Why Credit Card Companies Want You to Get a Premium Credit Card (and Why Retailers Don't)

Lyle Daly, The Motley Fool

The credit card you use has a big impact on how much money your credit card company and the retailer get during a transaction.

Cashier watching as customer pays with a credit card.

Image source: Getty Images.

The premium credit card market has gotten much more crowded lately, as these cards offer the most rewards for consumers and make the most money for credit card companies. Not everyone is a fan of premium credit cards, though. In fact, just about every retailer would prefer that you use a different payment method.

Why does it matter to a retailer what type of credit card you use? It all comes down to fees.

Fees make premium credit cards more profitable

Whenever you pay a merchant using your credit card, the card company collects an "interchange fee" on the transaction. The fee is set by a payment network, which facilitates electronic transactions (think Visa, MasterCard, American Express, and Discover). The card issuer, which is a financial institution that provides credit cards and lines of credit, receives that fee from the merchant.

Here's what most people don't realize: Interchange fees aren't consistent. They vary based on the following factors:

  • The payment network: American Express, Discover, Mastercard, and Visa all negotiate their own rates with merchants.
  • The merchant category: Different types of businesses pay varying interchange fees per transaction.
  • The card brand: Payment networks charge different interchange fees depending on the brand of card being used.

That last point is why retailers aren't fans of premium rewards cards. Let's use Visa as an example. At supermarkets, the interchange fee with a standard credit card may be just 1.2% of the transaction plus a flat fee -- say, $0.10.

However, the interchange fee with a premium card may be 2% or higher, plus the flat fee. That means the store pays 0.9% more, cutting into their profit margins. However, those high interchange fees are what allow card issuers to offer more rewards and benefits to customers.

What retailers do to fight back

The most common way retailers deal with interchange fees is raising their prices. This isn't exactly fair, because it means even consumers who pay in cash end up footing the bill for customers who pay with credit cards, but it's what happens.

Retailers have also fought interchange fees in court, and in 2018, Mastercard and Visa reached a $6.2-billion settlement over those fees. However, some major retailers, including Amazon, Target, and Home Depot, opted out of that settlement. They instead want to challenge a provision in the contracts Mastercard and Visa have with merchants stating that merchants must accept every card brand or end up with hefty fines.

Essentially, merchants want the right to decline specific brands of cards with higher fees. Then they could accept the lower-cost Mastercard and Visa cards while rejecting the higher-cost options.

Is this going to happen? It seems highly unlikely. Although it would be good for retailers, it would also lead to considerable confusion and frustration for consumers. No one wants to research whether a retailer accepts their specific brand of credit card before every purchase.

Should you join the premium credit card club?

If you don't have a premium credit card, you may be wondering if it's worth getting one. Since these cards have the most perks but often have annual fees of $400 or more, they're only a good choice for certain consumers.

You could benefit from a premium credit card if you:

  • Spend at least $1,500 per month on your credit card
  • Travel multiple times per year

As a general rule, premium cards are excellent for big spenders, because those customers will be able to rack up big rewards. Since these cards usually include plenty of travel benefits, they help out if you travel often and like to improve your experience through airport lounge access, hotel upgrades, and more.

If you don't want to pay a large annual fee or you don't think you'll spend enough to take full advantage, there are plenty of popular credit cards that don't cost nearly as much.

The cost of credit card rewards

Credit card rewards programs can offer substantial savings in the form of travel rewards or cash back, but someone's always footing the bill.

Retailers pay at least a portion of that through interchange fees, and those costs get passed on to consumers in the form of higher prices. While it's natural for those who pay in cash to feel short-changed, the best way to avoid that is to use a credit card as your main payment method. As the saying goes, if you can't beat 'em, join 'em.

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