Apr
28

Micropayments: Where Is Your Money Going?

Close your eyes and imagine the following scenario: You are on the road and decide to run into a gas station to use the restroom. Afterwards, you grab a coffee to go, but realize at the counter that you are out of cash. You hand the attendant your credit card, but he or she insists that cards are not accepted for purchases under $10. Disgruntled but late, you grab a few more items, stuff that you probably do not need, in order to hit the $10 mark. While you went in the gas station looking for a restroom, that stop now cost you $10, which will escalate on your credit card due to interest if you do not pay it right away.

Micropayments are what experts in the financial world call these tiny payments that seem like nothing at the time of purchase. Unfortunately, these little payments can add up to total a lot. Consumers can fall into debt with a bunch of micropayments if they aren’t very careful.

Why do stores require you to spend extra money? It isn’t a plot to rip you off. Retailers are charged a fee to process credit cards. Usually this fee is a percentage of the purchase, although in some cases the business is simply charged an annual fee. When you make a tiny purchase, like a coffee from a gas station, it doesn’t bring that gas station much of a profit. Therefore, if you use your credit card to make the purchase, the business could actually lose money because the profit gets eaten by the credit card fee.

Credit card companies, however, love micropayments for two reasons. First, it allows them to make the most money possible off of your purchase from the stores. (That’s why most places combat this buy setting minimums on credit card purchases.) More importantly, however, when a consumer makes a micropayment, he or she usually spends more than intended. It’s only a few dollars, right? At the end of the month a few dollars here and there every day can add up to hundreds of dollars the cardholder is not prepared to pay.

Avoid this by avoiding micropayments! Always carry about $20 in cash so that you are prepared for emergencies or for small unforeseen payments, like gas station coffee. Limit your micropayments so that your bill at the end of the month does not grow unwatched. This can help you stay out of credit card debt.