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How rewarding is your rewards credit card?

March 09, 2011

| Money Rates Columnist

It's not hard to find a credit card these days that offers some kind of rewards program. According to the Washington Post, about half of all credit cards in active use are cards that offer rewards or rebates.

So where are the credit card companies coming up with all the money for these offers, such as the 2 percent investment account rebates offered by American Express through Fidelity, or the 5 percent discounts offered by Discover?

Credit card transaction fees climbing

Well, merchants will tell you that they are paying for the rewards. Their "swipe fees"--the amount they pay credit card companies every time you make a purchase--have been increasing in recent years. And the fees charged to merchants for reward-card purchases are slightly higher than for other purchases, the Post said.

But the Government Accountability Office recently found that although fees are up 25 percent, merchant revenue is also up.

The bottom line is that customers are paying for their own rewards by paying higher prices for the goods they are purchasing with their rewards credit cards. Those higher prices are not particularly noticeable because those tacked-on fees are not noted when they make a purchase, the way a sales tax is, for instance.

That could be changing soon, however.

Cash purchasers hurt by higher prices

Although the federal government is likely to adopt restrictions on how much banks can charge merchants for swipe fees on debit cards, the credit card companies successfully persuaded Congress to leave their credit card fees alone. But late last year the Justice Department brought an antitrust suit against Visa, Mastercard and American Express, and as a result Visa and Mastercard agreed to allow merchants to list the transaction fees when a customer makes a purchase.

What's more, the new contracts between the two credit card companies and retailers will allow merchants to encourage customers to save money by paying cash or using less-expensive-to-transact credit cards. Most retailers won't be able to use these strategies until American Express negotiates a similar deal, however.

If any of this hasn't changed your mind about whether rewards cards are all that beneficial, consider a study by the Federal Reserve Bank of Boston that found the real victims of higher retail prices resulting from rewards cards are those who make less than $20,000 a year. These are people who don't typically apply for credit.

Those households also don't usually qualify for rewards cards or low rate credit cards. They purchase most of their goods with cash, and as a result, they are each paying $21 a year more in higher prices. In contrast, households with incomes in excess of $150,000 benefit to the tune of $750 a year.

New deal: lower prices for cash?

Given that merchants' revenue is likely up as a result of rewards cards--making them willing to put up with the credit card companies' transaction charges--and that consumers are examining prices more closely as a result of the recession, don't expect rewards cards to disappear any time soon. Card companies know their customers are drawn to rebates and rewards, so expect them to keep rolling out new offers.

But at the same time, don't be surprised if one of these days, when you're standing at the cash register, that you're offered a different kind of deal: a discount for paying with cash.

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