I was in New York a few weekends ago and saw that gas stations listed two prices for fuel, one if you paid in cash and the other if you paid in credit. The credit price was a little over 2% higher than the cash price ($2.49 vs. $2.44) and it was clear that you paid the lower price for paying cash. None of this “wink wink nudge nudge” stuff, they full out stated the price for gas with cash was lower.
Against the credit card merchant policy? Maybe.
Did we really care? No.
We paid cash… and saved 2% on the price, rather than getting 1% cashback on the backend.
Why Cash Is King
Credit card rewards work on one simple principle. When you charge a purchase to your credit card, the company charges the merchant somewhere in the neighborhood of 3% of the sale to process the transaction. That fee is split up between the credit card company and various middle men processors. The end result is that the credit card company passes some of that back to you as “cash back” or “points.” The gas station offered two prices because they are willing to split their savings with you. Rather than pay the 3% (or higher) fee, they’re going to give you 2% off. They save 1%, you earn an additional 1% on top of the 1% cashback you probably get, and everyone except the credit card company wins.
In the cases where they offer 5% cashback, they’re using that category of purchases as a loss leader to get a “share of your wallet.”
Use Cash As Negotiating Tactic
Cash can be a very powerful negotiating tactic. There’s something about cash that makes a deal seem “more real.” Go to any market where negotiation is expected and see what happens when you actually pull out cash.
One of my best memories as a kid was negotiating with a vendor in China for a pack of post cards. I was a kid, maybe ten or so, and the thrill of buying the post cards was in the negotiation. To be honest, I didn’t know much about negotiation.
All I knew was that the price started at 30 RMB and by the time we were done, I paid only 8 RMB. I hemmed and hawed, saying it was too expensive, and let the seller lower the price to 10 RMB. Then I went to my parents for money and asked for only 8 RMB. I went back to the vendor and said I only had 8 and he sold it to me for that price. Cash is king!
So, forget cashback rewards, forget credit cards, starting using cash.