Rewards Credit Cards

In a  January 16 article, the Wall Street Journal reports that credit card companies are increasingly promoting "rewards" credit cards to their business customers."It's easy to see why," they say. "About 42% of small-business owners carry a credit-card balance, according to July 2011 data from the National Small Business Association in Washington, D.C."

The article points out that the small business credit cards do not carry the same protection as consumer credit cards. "Small-business credit cards were excluded from the Credit Card Accountability Responsibility and Disclosure Act of 2009 that outlawed random interest-rate hikes and other practices on personal credit cards." Small business people are usually held personally responsible for the debt placed on these cards. The WSJ urges small business people to consider how using the card might impact their credit score.

I have another beef with the "rewards" cards. The "rewards" offered by these cards are not paid for by the credit card company. Rather, they are charged to the company that accepts the card for payment and deducted from the sale amount as part of the swipe fees. "Swipe fees" are the fees that a credit card company passes on to the retailer who accepts the card as payment. These fees vary, but I have seen rewards cards with fees as high as 4.6% of the purchase.

The seller who accepts the card has no way of knowing what the fees are until he receives his statement from the credit card processor. Moreover, there appears to be no limit to the fee that can be tacked on to the transaction in this manner. The consumer or small business person is happy to use the card for payment because he is collecting a "reward." It is the proverbial free lunch. But the reality is that retailers, and now suppliers who sell to small businesses, are simply jacking up prices to cover the cost of the fees. In essence, even cash customers are footing the bill for these cards.

The main benefactor in this arrangement is the financial services industry and, to a certain extent, those who have strong enough credit to qualify for a rewards card. If more businesses use rewards cards to pay for supplies, in addition to accepting these cards as payment for their products and services, prices will inevitably go up.

Happy Birthday Ben Franklin. Born January 17, 1706