Why do shopkeepers like credit card users?

I am sure you have sometimes wondered why shopkeepers are willing to accept credit card even though he must be incurring expenses in encashing the credit card charge slip that you sign.

A long time ago, before I was initiated into the world of retail banking, I asked this question to a relative of mine, who ran a large consumer shop. Credit cards were just beginning to make a mark in India then, and I knew my relative (we belong to the thrifty marwadi clan with a reputation for making the buck go much farther than the creator intended it to go) would not pay the 2.5% charge - those charges have reduced substantially now — to the bank without valid reasons.

During those days, not all his competitors accepted credit cards, so competitive pressure clearly was not a reason. He then let me in on the secret. Consumers who pay by card invariably shopped for far larger amounts on average than consumers who paid by cash.

So what he lost by way of bank commissions, he more than made up through increased margins on additional sales. To prove his point, he asked me conduct an interesting experiment, which I duly did.

The next time I took a client out for lunch I paid for the bill by credit card. I realised much later that I had left a much larger tip than I would normally have left if I was paying by cash. Somehow, the fact that I was not counting out actual currency notes but just signing on a charge slip made me far more generous than I normally would feel. If this was the case with me, I can imagine the situation with other consumers not blessed (or should I say, cursed) with my thrifty gene pool!

So does this mean that the credit card is something to be avoided because it makes you spend more? That is clearly not so.  In fact, after the experiment I became very conscious and worked out a good balance. I now pay the original bill by my credit card and leave the tip in cash. Trust my marwadi genes to come out with a win-win solution.

In fact, all of us can work out similar solutions. As long as you are conscious and aware that credit cards can make you unwittingly spend more, you will be on your guard and spend accordingly. The next time you shop using a credit card, be sure you are not spending more than what you would have spent in case you were using cash for that purchase.

If you are a regular credit card user, then make it a habit to keep your credit card spends according to your ability to repay. True, the credit card allows you the flexibility of paying only 5% of the statement amount, still many of you may not be aware that this facility has a huge price attached to it as the card company will slap an interest on the entire amount even if you pay only a portion. This interest would be as high as 40-50% after considering taxes.

The situation can be avoided if you make it a habit to clear the entire amount by the payment date. That will also help you realise that the credit card is a product which allows you to enjoy free credit for only a certain period. Remember this about credit cards — if used effectively, they are a boon, if not, then a bane!

The writer is CEO, Apna Paisa, a search comparison engine for loans, insurance
and investments. He can be reached at hrdna@apnapaisa.com