How others can get penalized when you use the card

Rewards credit cards might seem like a convenient option for many. However, one must understand that the usage of these credit cards generate a small, yet significant sum of money to be transferred to the credit card payers. This happens because the retailers don¡¯t necessarily have different price tags based on different modes of payment. The cash payment generally means all modes of payment except credit cards.

Credit card companies restrict retailers from passing on these fees to the consumers while using the credit card. This fee averages around 2%, (as per the National Retail Federation). Since this surcharge cannot be passed on to cardholders while using the credit card, the merchants increase their overall prices in order to offset the burden of this surcharge on them. Thus indirectly, all the consumers, even those that do not use the credit card are forced to pay extra to cover costs.

These fees actually help in funding the credit card companies, as well as their rewards programs, and those who make cash payment end up paying more in the retail outlet and thus indirectly fund the rewards that the others get to enjoy. The report also indicates that the poor consumers are in reality subsidizing the wealthier ones. This is due to the fact that spending is directly related to income, so when there is lesser income, the spending is also less.

It has been stated that on an average, each household that uses the credit card gets approximately around $1,482, and each household that uses cash pays around $151 to these card users each year. Hence, the only solution suggested has been to lower merchant fees as well as card rewards in the interest of consumer welfare.

The new interchange financial reform calls on the Federal Reserve to set some benchmarks for interchange fee that is proportional as well as reasonable in debit card transactions. This can happen if the card minimum is less, and if merchants are allowed to offer discounts on a preferred mode of payment like debit cards or cash instead of the credit cards.

However, it is a matter of debate if these new reforms will ultimately benefit consumers or not. This is because it would be up to the merchants to pass on the benefits to the customers, it remains to be seen if that will really happen. Merchants are not required to lower their prices or offer discounts when customers use cheaper payment modes.

Bryant Park

Bryant Park is a financial consultant for one of the companies listed on Wall Street. He writes on a variety of topics ranging from credit cards to different loans that can be availed by consumers. He holds a bachelor degree in Financial Services from Dartmouth College.