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 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 2.5% charge the charges have reduced to around 1-1.50% now – to the bank without valid reasons. During those days, not all his competitors accepted credit cards; hence competitive pressure clearly was not one of the reasons..
He then let me on the secret. Consumers who pay by credit 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 in fact asked me conduct an interesting experiment, which I duly did.
The next time I took a business associate out for lunch I paid the bill by credit card rather than cash that I normally did till then. I realized 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. Today I cannot live without my credit card that I use on numerous occassions. But I use it with care. 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. Make a list and budget
of what you want to buy before you begin shopping,avoid impulse purchases, etc As long as you are conscious and aware that credit cards can make you spend more unwittingly you will be on your guard and spend accordingly. So the moral of the story is to use the convenient tool that a credit card is and use it responsibly and being aware of the potential pitfalls.