Credit Cards

When you accept credit cards, you make it easy for yourcustomers to buy from you because you’re offering convenience andthe chance for the customer to buy on “float.” Yet the money isn’tcoming out of your pocket–quite.

A kitchenware store in Atlanta might take a Visa card purchasefrom a customer who lives in Milwaukee and has a credit card thatwas issued by a bank in that city. The sales slip is depositedalong with the other receipts in the store’s bank account.

The Atlanta bank credits the amount of the sale less a handlingfee, generally 4 to 7 percent. Assuming the sale was $20 and thehandling fee is 5 percent, the Atlanta storeowner actually receivesonly $19. The loss of the one dollar is built into the store’spricing and profit structure and passed along to the customer.

Then the Atlanta bank transfers the debt to the customer’sMilwaukee bank, which stands behind the debt and transfers thenecessary funds to the Atlanta bank. The Milwaukee bank then billsthe customer for the $20, plus interest if payment isn’t receivedby a certain date. The bottom line is that the storeowner inAtlanta offered credit without much risk, the Milwaukee customerreceived the merchandise, and the banks in both cities mademoney.

Since the credit card companies are shouldering the risks ingranting credit, they expect merchants to help them cut theirlosses. Both Visa and MasterCard publish regular lists of cardnumbers that are unacceptable for some reason, and they send themout to merchants and expect you to look at this list beforegranting credit.

American Express, Discover and Diner’s Club are also creditcards you may decide to accept. They differ considerably frombankcards because their credit requirements are generally higher.Most bankcards grant credit if a person has a job, a permanentresidence, and no questionable information in a computer creditfile.

These so-called “entertainment cards” generally have a highercredit ceiling. Bankcards will put a credit line to a customer’saccount and hold the person to that limit. Entertainment cards aregeared to the more affluent consumer with lots of discretionarydollars to spend.

The final difference is that entertainment card companies expectto be paid in full each month, while the bank cards give thecustomer two options: Pay the balance in full or pay a minimum of 3percent of the total balance plus interest monthly. With high ratesof interest, banks profit handsomely if cardholders don’t pay offtheir entire credit card bill at once.

If you haven’t already been approached by one of the majorcredit card representatives, approach them. Their sales associateswork on commission and are happy to pitch the advantages of thevarious programs.

Offering a credit card program eliminates the time you wastehandling credit sales. When you consider that certain costs ofcredit are fixed (posting accounts, billing and so on) and willcost you the same for a $10 sale as for a $500 sale, this argumentalso makes sense.

A marketing benefit that helps your advertising sales is theautomatic mailing list the credit-card sales slip provides youwith. You can (if you ask customers to fill in their name andaddress) have a day-by-day record of that customer’s purchases anduse your mailing list to promote future sales by mail.

Another benefit the sales personnel will tout is the security ofcredit card sales. You will (if you follow the credit cardcompany’s guidelines) be able to collect your money even if thecardholder skips town. The credit card operation assumes the riskand pursues collection, which helps you spend your time moreprofitably running your business.