by Mike Glanz
Hello all! I am a big time fan of Len Penzo and it’s a privilege to share some of my thoughts on his blog. A few weeks ago, I read Len’s article on why choosing debit or credit is like picking salad dressing; in that post he mentioned that he always chooses credit over debit when using his bank card unless he needs some cash back.
Today, I’d like to share one additional thought for you to consider before making the choice between credit and debit, based on a small business owner’s perspective: choosing credit ultimately costs small businesses and YOU more money.
Here is an overview chart summarizing the costs and benefits of each option.
|Payment Type:||Consumer Benefit:||Business Cost:||Consumer Cost:|
|Credit||Fraud protection & occasional rewards||Per transaction & percent||Documented propensity to spend more|
|Debit||Limited fraud protection||Per transaction||Nothing|
Using Credit Costs Small Businesses Money
One major thought to consider when choosing between credit and debit is the effect it has on your local small businesses. The difference in cost between debit and credit transactions for a small business is around 3 percent. The business typically pays approximately 30 cents for each debit transaction whereas they pay approximately 30 cents plus 3 percent of the order per credit transaction.
What difference does 3 percent make? Let’s say after paying all its costs, advertising, payroll, taxes, and more taxes, a small business has a margin at the end of the day of 10 percent (that’s pretty good nowadays, especially for a smaller business); that means your 3 percent credit card fees are costing them 30 percent of their profit!
As an example, if every customer paid with credit, a small family business would see its profit reduced from $50,000 to $35,000 — and if their margins before card fees were closer to 5 percent, then you are looking at cutting their profit from $50,000 to $20,000!
Why should you care? Three reasons:
- What’s good for your community is good for you.
- Supporting small businesses promotes competition, which increases
value, and decreases prices.
- Many small businesses provide better service (If price were
everything, no one would buy Apple computers!)
Using Credit Cards Costs YOU Money Too
By choosing credit over debit, small business owners aren’t the only ones who have to pay more; you do too! Here’s why:
First, credit cards make you spend more money. Dave Ramsey has noted in the past that people using credit cards typically spend over 10 percent more money than they would have otherwise, dwarfing the “1 percent cash back” that you may be getting back in rewards.
Second, the added fees that local small businesses have to pay for credit transactions often gets passed on to the consumer through higher prices and that means less money for your local economy.
Now, I understand the need for fraud protection when shopping online or even out of town. However, is fraud protection really necessary for shopping at your local grocery store, restaurant or the like? They need our business and support just as much as we rely on them to deal honestly with us. It’s nice to be part of a community who you know you can trust.
For all these reasons, I choose to stand by my local stores rather than taking my business down the road to the megastores, and I will continue to think twice when that option to choose credit or debit pops up. I will ask myself if I really need fraud protection at this store. Likewise, I will also consider whether choosing credit, instead of debit, will just hurt us all in the long run.
As Len mentioned, we all have different scenarios running through our heads as we approach the decision between the two — online shopping, the idea of credit card rewards, convenience, etc. My hope is that you are now more aware as to how this choice ultimately affects your local businesses, and therefore you!
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