Pay With A Credit Card You'll Be Rewarded

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Credit cards are one of modern life’s great conveniences—the ability to make purchases online, never have to worry about carrying enough cash, and the easy access to credit should the need arise, are just a few of the benefits most of us have come to take for granted.

But unbeknownst to most credit card users, every time they swipe, it costs someone else money. According to a recent research study from the Federal Reserve Bank of Boston, every year, households who mainly pay in cash end up paying $151 for the products and services they consume. In fact, on average, $151 of cash-paying households’ income gets transferred to card-using households each year, who on average collect a total of $1,482 through the process each year.

How does this strange math play out? Well, as it turns out, credit card merchant fees, the fees that merchants pay to card issuers for processing credit card payments, may have a curious way of redistributing wealth. Every time a consumer pays with credit card, the merchant running the card pays a percentage of the transaction in fees (usually 2-3 percent) to the card issuer. In order to compensate for this cost, merchants raise the price of their goods and/or services. As a result, cash payers end up paying a higher price to foot their cardholding counterparts’ credit use.

While cardholders themselves also pay that higher price, those who participate in credit card rewards programs (funded mostly by merchant fees) receive those extra charges back—and then some. For cash users though, that money is gone for good. Furthermore, the study highlights the direct correlation between credit card rewards program participation and income level, showing that the higher the income bracket, the more the card user ends up benefitting from the system.

In short, since most cash payers rank among low-income households, unwittingly, rewards credit cards become an avenue of transferring money to high-income household. Since there are proportionately more cash payers than rewards cards users, the financial benefits to rewards cardholder households, on average, are higher than the amount paid by each cash-paying household.

Why don’t merchants simply charge people who pay with credit cards the cost of the merchant fees? Well, up until recently, discounts for cash transactions were not permitted, by law. This is about to change, as the recently passed financial reform bills permits merchants to offer discounts for cash payments and also to set transaction minimums for card use. In addition, the new legislation requires merchants to cap their fees for debit card charges at “reasonable and proportional” figures.

However, it remains to be seen how these new policies will affect consumers. For example, a November 2009 report from the U.S. Government Accountability Office found that lowered merchant fees in Australia had no bearing on the resulting price consumers had to pay: even though retailers were able to hold onto more dollars due to the new laws, those savings weren’t passed on to consumers.

Still, the jury remains out on the impact of the new law. For rewards cardholders happy to earn 1 percent cash back on purchases, merchants offering an immediate 2-3 percent no hassle off for cash payments may well find many interested takers.