The Myth of the Costa Rican Credit Card Swindle

There is a misconception among expatriates and travelers that Ticos are out to take advantage of Gringos. The myth has diverse origins but one of the most persistent is the extra charges at hotels, restaurants and tours for using a credit card.  Other imbalances are easy to explain.

For example, Costa Rican nationals pay less than half as much as foreigners for entry into the National Parks, but this is perfectly reasonable since their taxes help maintain these natural areas.

Visitors often feel singled out when they receive a speeding ticket for exceeding the prescribed snails pace of 25 kmph (barely more than a brisk walk) in front of a school, but the highway patrol doesn’t discriminate and careless Ticos spend just as much time lamenting speed traps as their U.S. and Canadian neighbors.

The nearly 17% “tourism” tax added to seemingly everything that we foreigners buy may seem unfair until you consider that this is the way we pay our share for the roads, health care, police, and other services we use while visiting.

Credit Cards

Added fees of up to 10% for using credit cards in hotels and restaurants create one of the most persistent sources of misinformed righteous indignation.  Since this practice doesn’t exist at home and many more foreigners than locals use cards, some travelers believe it’s an unfair way to pull a few extra dollars out of visitor’s pockets.  In fact the system of charging more for credit card transactions than cash is far more equitable than the U.S., Canadian or European practice of accepting all payments as equal.

Credit card surcharges in Costa Rica are not a plot by proprietors to make extra money; they likely make more on cash transactions.  It costs a lot to use credit cards. If you carry a balance, or ever make a late payment you know about the exorbitant interest rates and late fees, but the fees and interest that appear on consumer’s statements are only the tip of the credit card charges iceberg.

The profiteers are the banks/card companies who in one way or another collect as much as 15% of any credit card transaction before they start charging interest or penalties. Every time a consumer uses a card there is an added fee-that the consumer never sees-called the “discount rate”,  (I’d really like to meet the marketing genius that came up with that term because it sure doesn’t look like a “discount” from the consumer’s or business person’s perspective). Businesses that don’t charge an extra fee for using credit cards still have to pay the cut to the bank and raise their prices to cover the cost.

The discount rate charged by card companies varies from about 2.5 to 10% depending on the type of business and location.  The travel industry is generally considered high risk because there is no physical product and the purchases are relatively large.  Costa Rican businesses are also penalized for their foreign location.  The farther you are from Wall Street the higher the rate.  Typical discount rates for hotels in Costa Rica are on the order of 6-8%.  That’s less than 10% so it may still appear that the hotel owner is gouging you with a surcharge, but I assure you they are not.

Our small business Toucan Guides Inc. is located in the U.S., sells a physical product (maps of Costa Rica) that costs relatively little ($9.95), has nearly perfect customer satisfaction rates and liberal refund policy just in case, and has an unblemished banking record.  This earns us an exceptionally good discount rate on the low end of the two percent range.  However, the discount rate is not the only cost of processing credit card transactions.  There is also a per-transaction fee (charged to us even when a customer’s card is rejected because it’s expired or over the limit), an account maintenance fee, a statement printing fee, and a fund transfer cost.  Even though our discount rate is a couple of percent our costs for processing credit cards account for about 10% of the total cost of a map, and the Costa Rican hotelier with a discount rate of 8% has much higher total processing costs than that.

Since Toucan Guides sells most of its maps in the U.S. where customers are used to the fees being added into the price of goods, that’s what we do.  The Tico’s choose to give you a choice of paying part of the extra cost for the convenience of using a credit card.

Of course the banks and card companies would defend themselves by pointing out that they have to cover their costs.  It is unsecured credit after all and carries a risk that the customer won’t cough up the payment.  Unless the customer disputes the transaction or the quality of the service, the hotel owner still gets their money (minus the discount rate and other fees) from MasterCard or VISA.  The bank has to eat the loss-at least temporarily until they increase the discount rate for the hotel owner because she deals with high risk customers.

The card company also has to cover the cost of making that money available.  Typically if you pay with a credit card the hotel owner will see the funds electronically transferred into his account in a day or two, but the card company won’t get their money until you send in your payment a month or so later.  If you pay on time, you won’t be charged interest and the card company has effectively given a one month interest free loan of a few hundred dollars.

Obviously they incur a costs, but don’t start crying crocodile tears for them yet, they own the bank so their interest costs on the billions that they have out in these short term loans are a couple percent a year rather than the 20% or more they might charge consumers who carry a balance.   Don’t forget they also collected that “discount” from the total transaction and they’ll charge you another percent or two for the currency exchange when they bill you.  These companies measure their profits in tens or possibly hundreds of billions of dollars a year, and that profit is largely a result of fees charged for moving money around like this.

To some extent the people and government of Costa Rica do try to take advantage of visitors, but in a benign or even beneficial manner.  The funds generated from ecological and recreational tourism allow this tiny country to protect a larger area of its unique ecosystems for future generations than any other country in the world.  Tourist colones help keep the beaches clean, water pure and roads and other infrastructure from deteriorating beyond usability.  While Ticos certainly benefit, so do travelers and the world community.