With credit card reform, cash will be king

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According to The Wall Street Journal, new laws regulating credit cards could soon change the way that America buys everything from clothes to groceries. In the process, it could also show customers the actual cost of the little plastic cards in their wallets.

Among other things, the new credit law currently being proposed in the Senate could introduce transparency into the world of credit cards. For example, most customers aren't aware that in return for the convenience of being allowed to take credit, stores generally give credit companies between 1.5 and 2 percent of the gross proceeds of their credit sales. By comparison, debit card sales cost the stores approximately one percent.

While the convenience of credit undoubtedly draws customers to stores that accept cards, it also means that these stores either have to realize smaller profits from their credit sales or charge all customers more to make up the difference. Retailers can theoretically offer cash customers a discount off the credit-card price, but credit contracts, as currently worded, make it difficult. Basically, to offer a reduced cash price, stores need to mark each item with both the credit and cash price. The credit price has to appear in a larger font and has to be more prominently positioned. Companies that fail to abide by these rules can face penalties from their credit providers.

Adding to the situation, many credit card companies offer customer discounts and other perks to encourage credit usage. That means many credit card customers effectively end up paying the reduced, or "cash," price, while cash payers get stuck bearing the burden of the tariff on credit card usage. Right, it's totally screwed up.

The new law would free retailers to do what they've long wanted -- either give cash-paying customers discounts off the marked price or charge credit-card users more, without all the complicated re-labeling and threat of penalties, etc. Attempting to block the proposed legislation, credit card companies have claimed that allowing stores to charge separate credit and cash prices could be a form of bait-and-switch for the credit customers. The companies further argue that the bill is an attempt to let retailers off the hook, ensuring that they don't have to pay "their share."

For quite some time, analysts have been warning that the current real estate crisis and Wall Street meltdowns are only a prelude to a credit crisis. As more and more customers get in over their heads with climbing interest rates and fees, it seems likely that they will begin to default on their cards. In that context, anything that tempers, or at least doesn't actively encourage, credit card usage could be a good thing. Allowing both cash and credit customers to pay their respective prices isn't only logical and fair then -- it might keep from throwing more gasoline on the fire.

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