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Shoppers may have to weigh surcharge in choosing cash vs. credit card

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Sun-Times Library

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Updated: May 3, 2013 12:15PM

How much is it worth to you to pay for your purchases using a credit card? That’s a question that shoppers for everything from groceries to clothing to airline tickets may soon have to start asking themselves. As part of the settlement in an epic battle between retailers and card issuers, merchants are now allowed to charge additional fees to consumers who pay with a credit card.

Of course, you could always pay in cash (or check or debit) — and avoid fees for credit card usage. And you could avoid merchants who choose to tack on these fees, which could be as much as 3 percent of the purchase price.

It’s a tough question for consumers — especially if the idea of charging an extra fee for the use of a credit card catches on. And it will be a tough call for merchants, who risk alienating their customers if they add the fee.

In the past few weeks, seven states, including Illinois, have introduced legislation to ban the use of surcharges on credit purchases in the name of consumer protection.

How did this happen?

You might be wondering how this idea of credit-card surcharges came up in the first place — an idea that incents us to go back to a cash or paper check-writing economy, or to use debit cards in place of credit.

The opportunity for credit-card surcharges came about as part of the settlement of a $7.25 billion class action suit charging that card issuers had a monopoly that included setting fees. That lawsuit was settled in July 2012, after a seven-year negotiation. Part of the deal required banks to relax their strict rules requiring merchants to absorb the cost of processing payments.

Consumers would not have been aware of how the credit industry was splitting or absorbing the fees and costs of extending credit — until this recent move by retailers to charge extra for use of a credit card — a charge made possible by the lawsuit settlement.

And that brings us to the argument over whether adding a fee for credit-card usage is “fair” to consumers, and whether it helps or hurts the economy. As you can imagine there are arguments on both sides.

Surcharges a good idea?

Will surcharges help consumers avoid credit-card debt, making them think twice before they say “charge it?”

Or will those surcharges only add to the debt burden being faced by consumers who are forced to use credit for essentials, because they don’t have money in the bank to use a debit card?

And will encouraging the use of checks or cash make our economy less efficient and more costly, merely adding more fees and pushing prices higher?

Will it make banks less profitable — causing them to raise fees elsewhere?

This “small” fee of up to 3 percent has huge implications in our multi-trillion-dollar consumer economy.

One thing to consider in this debate: The price of credit is already being paid by everyone. The merchant’s overhead cost of processing credit is already part of the price of everything you buy, whether you use credit or not. The cost is built into the prices they set.

So unless they first lower all their prices across the board for everyone, and only then charge a checkout fee to a customer paying with a credit card, this plan to add a checkout fee seems to be “double dipping.” Credit customers would be paying twice for the cost of credit.

Perhaps merchants should offer lower prices for those who do not use credit — as opposed to a surcharge for those who do. We might go back to those days of the “underground economy” in which the common phrase was: “I’ll do it for less if you pay cash.” That tended to apply to services such as electrical or plumbing, where cash was king. But some people still figure they can walk into a family owned business and expect to get a discount if they offer cash. Charging for credit inevitably causes a two-tier pricing system.

It’s your choice

You will still have choices when you shop. If you don’t want to pay extra for credit-card purchases, you can use your debit card. That presumes you have cash in your account to immediately pay for your purchase and are using your card for convenience and for the protection that use of a debit-card offers against fraud.

Or you could go back to writing checks. Remember the delays in the checkout line at supermarkets and drugstores as you waited behind a customer seeking approval of a check? How inefficient. And it unfairly discriminates against those who need to use credit to pay for the unexpected car repair, or broken refrigerator, or doctor bill.

The real question is whether anyone believes that charging a surcharge for credit will contribute to lower prices for those who use cash or debit, thus helping consumers in these tough times. If you believe that will happen, the Easter bunny is coming soon! And that’s The Savage Truth.

Terry Savage is the Chicago Sun-Times’ nationally syndicated financial columnist, and a registered investment adviser.

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