Cash Discounts Could Make Rewards Cards a Lot Less Rewarding

Listen to almost any consumer advocate these days and you’re likely to hear this mantra -- leave your credit cards at home and pay cash. It’s not just about concerns over accumulating debt. The idea is that paying cash makes you think harder about what you’re buying, instead of taking the easy way out and charging it. You also save on those double-digit interest rates that credit card companies charge, and sidestep those nasty fees that the card companies impose.

But now there may an even stronger incentive to pay in greenbacks: Merchant discounts.

Under a little-noticed provision in the new financial reform law, retailers will be able to offer discounts to customers who pay cash instead of using a credit card. Since the retailer pays the card company a transaction fee of about 2 percent on every credit-card purchase, the discount (theoretically) could amount to at least that much. Depending on the mark-up on the item you’re buying, the price cut could be even bigger.

It may take some time many before retailers get on board, but some are already there. Gas stations were among the first to adopt a discount-for-cash policy and now other merchants, including restaurants, are looking into doing the same.

If the trend becomes widespread, some financial analysts foresee the death of the rewards card. Think about it: Rewards cards that offer 1 percent to 2 percent cash back on purchases can’t compete with a straightforward, no-hassle 2 percent or more cash discount. On top of that, there’s no guarantee you’ll collect your full rewards from your card issuer. As this article details, card companies are implementing caps on rewards, charging processing fees, and in some cases flat out voiding accumulated rewards points when card holders are late on monthly payments.

Figuring out whether a card that pays airline-travel rewards is competitive with a straightforward cash discount is trickier, but the odds are very good that you’re not getting a 2 percent bang for your credit-card buck. In addition, using those rewards points is getting tougher as airlines slap restrictions on redeeming your points.