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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

This New Credit Card Fee Could Turn You Off Plastic Forever

Updated: July 13, 2012 at 4:36 p.m.

I pay for virtually everything with my credit card

I've even done $2 purchases with my card.

Why? Miles.

Because of our little obsession, my wife and I have been able to go to Tokyo, Rome and other world capitals airfare-free. 

We're able to do this because we're disciplined. We pay for everything with our card, but we pay our card off each month. That keeps us from being clobbered by finance charges, which over time can add up to far more than the cost of an airline ticket. 

It hasn't always been this easy for me, though. In my 20s, I was drowning in credit card debt. I hunkered down for several years, paying every spare cent I had to my credit card issuer. Once I overcame that debt -- five figures worth -- I was determined to make credit cards work for me, rather than against me.

I've done that for about a decade; however, an apparently imminent rule change may force me to reconsider my plan.

The Lawsuit That Could Change The Way You Pay 

Here's what's happening:

Kroger, Payless ShoeSource, Safeway and others have sued Visa and MasterCard and several large banks, saying that the parties involved have conspired in setting what are known as interchange fees.

Every time you swipe a credit card or debit card, the retailer pays a fee to the card's issuer -- typically 2% or more of the purchase price. Recent financial reform legislation sliced these fees substantially for debit cards, but left credit card interchange fees unaffected. 

Why Retailers Are Mad

Even though Visa and MasterCard don't collect the interchange fees -- the banks do that -- they set the rules for how the fees are charged. It is part of the contract that a retailer signs with the credit card networks in order to accept the credit card in their stores. Retailers that break those rules may not be able to accept that type of card in their store anymore.

Here's the retailers' problem: They feel hamstrung and taken advantage of by the credit card networks. 

For example, Visa and MasterCard's retailer agreements typically prohibit retailers from adding a surcharge on to purchases made with a credit card. (According to, American Express and Discover -- which are not part of this lawsuit -- have less restrictive rules on credit card surcharges.) In other words, if you buy an iPhone at Target, Target must charge you the same price for that phone whether you use plastic or cash. That's true even though Target will get hit with a $4 interchange fee on the credit card purchase -- 2% of $200. 

That's likely about to change.

On July 13, Robbins, Geller, Rudman and Dowd LLP, a law firm for the merchants involved in the case, announced a settlement that they called "the largest antitrust settlement in history."

As part of that settlement, according to a statement by the law firm, "Visa, MasterCard and the banks, including JPMorgan Chase, Bank of America, Citibank, Wells Fargo, Capital One and other major banks, have agreed to establish a fund of $6.05 billion to pay merchant claims." Visa and MasterCard, in addition, will reduce interchange fees for eight months, while new rules are implemented.  

Finally, the Wall Street Journal reports that the settlement also permits merchants to charge higher prices to customers that pay with plastic.

That last part really drew my attention. That means it may soon cost more to buy with a credit card than with cash. To continue the earlier example, Target could charge someone $200 for buying an iPhone with cash, while charging someone $204 for buying the identical phone with a credit card.

A Game Changer

I completely understand the retailers' rationale in angling for the surcharge. After all, they're just trying to recoup the cost of those interchange fees. It's just business. 

For me, however, it could be a game-changer. If I have to pay extra for everything I buy with a credit card, there's no point in collecting all of those frequent flier miles to try to earn big trips. It just wouldn't make sense financially.

Here's why:

- Say you spend $1,000 per month on your credit card -- not an unusual amount for those who are miles-obsessed -- for a total of $12,000 in credit card spending each year.

- Then, say each retailer upcharges you 3% for using your card instead of cash.

- That's $360 a year in extra charges. 

Now that $360 won't get you a flight to Tokyo each year, but with some advance planning, it could certainly get you from New York to Los Angeles. And in five years -- which is how long it may take you to save enough frequent flier miles for an international trip -- you could be looking at $1,800 in extra payments just for using your credit card.

No, thanks. I'll start paying cash if that happens. And I certainly wouldn't be the only one either, which is why Visa, MasterCard and credit card issuers have fought so long and so hard to keep these rules in place. After all, we love the convenience of credit cards, but would we love them as much if -- on top of finance charges and all the other fees associated with a credit card -- the price of an individual item went up just because we used the card?

How The Worst-Case Scenario Can Be Avoided

It is possible that this nightmare scenario wouldn't play out, however.

First of all, the surcharges are illegal in 10 states -- including California, Texas, New York and Florida -- so folks in those states wouldn't have to worry about any of this.

Also, it remains to be seen what the reduction in interchange fees will look like. If there is some cap implemented on the fees, the math becomes much less daunting for consumers. For example, if you buy a $1,500 TV with a credit card, a 2% surcharge could mean that you'd pay $30 more just for paying with plastic. But a company could cap these fees at $10 for a single transaction, meaning that the impact wouldn't be as great as it could be. 

Or perhaps, as Consumerist said, "By allowing merchants to tack on surcharges for credit card purchases, it would compel credit card providers to slash their swipe fees and actually compete against each other. The idea is that if the swipe fees were dropped to a more acceptable level for merchants, they wouldn't then have to add a surcharge for credit card customers." 

I'll believe that when I see it, though.

The Investing Answer: It's a great time to reassess what you want out of your credit card. Even though the real impact of this reported settlement may not be felt for some time, use this as the impetus to re-examine the benefits you get from your card.

For example, if you once traveled a lot but don't any more, it may be smart to switch to a cash-back card. Or if you're still using the same credit card you used years ago when your credit was terrible, consider switching to better one -- with a lower APR and better fee structure.