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Why Paying With Credit Could Cost More

Stores could charge more if you used credit cards over cashWould you be willing to pay a higher price to buy a TV using a credit card rather than paying with cash or debit?

U.S. consumers may soon be faced with that dilemma following the tentative settlement of a multibillion-dollar, class-action lawsuit brought against Visa and MasterCard by a group of retailers who claimed the two companies overcharged them for so-called swipe fees on credit card transactions.

Merchants pay Visa and MasterCard — and the banks that issue their credit cards — a small “interchange” fee for the right to accept their cards at checkout.

The fees — typically a percentage of the sale — are generally invisible to consumers because merchants who accept credit cards aren’t permitted to charge different prices for the same item depending on how you want to pay. (Those fees are likely included in the price of the product or service you purchase.)

But that could change soon.

Under the terms of the settlement, Visa and MasterCard agreed to change their rules to permit retailers to impose a surcharge on credit card transactions. The rule changes would likely be implemented in early 2013.

In addition, Visa, MasterCard and the banks who issue their cards agreed to pay the merchants billions of dollars in damages.

The settlement doesn’t directly affect American Express and Discover, which weren’t part of the lawsuit.

However, if merchants decide to start charging their customers who want to pay with their credit cards, those cards will likely be affected, too.

That’s because both AmEx and Discover discourage surcharging unless merchants also impose a surcharge on customers who pay with other cards.

It’s not clear exactly how — even if — merchants will implement these surcharges and how much they will charge (it can be less than, but not more than what they pay the credit card companies), although they are required to disclose them.

In the past, retailers might have been reluctant to impose a fee on customers who want to pay with credit for fear of losing the sale. But that’s less of an issue today, since debit cards now account for more than half of retail spending.

If you buy gasoline in Connecticut, New Jersey and some other states, you’ve already seen how this works.

Under a settlement with the U.S. Justice Department last year in a separate lawsuit, Visa and MasterCard agreed to drop their rules that prohibit merchants from offering discounts for using payment methods other than credit. Many stations now charge several cents a gallon less for customers paying with cash or debit.

It’s possible, if not likely, we’ll see those changes move beyond gas stations in the new year.

However, it still could be a risky proposition for retailers to discourage credit card use by charging more.

Credit card customers tend to spend a lot more than cash and debit customers do.

Moreover, millions of people pay with credit cards in order to earn cash-back, airlines miles and other rewards.

They’re likely to favor retailers who don’t surcharge, or charge less, than those merchants who do.

Of course, this threat may induce Visa and MasterCard to lower their interchange fees to merchants, in which case consumers may see little change.

But we may also see credit card issuers cut back on their rewards if they can’t charge retailers as much as they used to.

Next year should be a very interesting year for the credit card business.

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