Why It Pays to Use Cash

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BOSTON (TheStreet) -- A woman in California named Diane Campbell made headlines when she tried to buy an Apple (Stock Quote: AAPL) iPad with a wad of saved-up cash, only to be told by an Apple store employee that the company didn't accept cash for iPad purchases.

Apple eventually reversed its credit-only policy, but the story was a reminder that there are still people out there who prefer to dole out Benjamins over plastic. While maintaining a line of credit is important for keeping a high credit score, there are plenty of reasons to choose cash over credit.

1. Your credit card transactions are punishing the retailer: Most consumers realize that retailers pay credit card processing fees, but many don't realize the extent of these fees. Overall "swipe" fees charged to retailers and other business by Visa (Stock Quote: V) and MasterCard banks totaled $48 billion in 2008, up from 16.6 billion in 2001, according to the National Retail Federation, with debit swipe fees accounting for $20 billion of the total.

Generally, this interchage fee is about 2% the value of each transaction, but retailers take a bigger hit when consumers use cards to buy a single little item - a cheap pack of gum, for instance - to the point that the fees can exceed the profit margins. "A retailer can literally lose money when a consumer uses a credit card for small items," says Craig Shearman, a spokesman for the foundation.

2. Your credit card transactions are punishing the poor: One of the most obvious reasons to pay with a credit card instead of cash is the rewards program - in which the credit card company offers airline miles, points toward merchandise, or even cash back for paying with credit. The problem with that system is that it punishes those who can't afford or qualify for credit cards. Again, most merchants must jack up merchandise prices across the board in order to keep up with credit card swipe fees.

"What most consumers do not know is that their decision to pay by credit card involves merchant fees, retail price increases, a nontrivial transfer of income from cash to card payers, and consequently a transfer from low-income to high-income consumers," reads a recent study by the Federal Reserve Bank of Boston. On average, each cash-using household effectively pays $151 to card-using households, and each card-using household receives $1,482 from cash users, every year, according to the study.

3. Your credit card transactions are punishing your bank account: Average annual percentage rates for credit cards have increased across the board in the past six months, according to Creditcards.com. As of July 28, the average APR was 14.44%, compared with 13.17% in January. Those consumers who always pay off the full balance each month are still subject to late fees of up to $25 per month if they miss the payment deadline by a day or two.

4. Retailers soon may reward you for using cash: Clearly, retailers generally prefer customers to pay with cash, but many have historically avoided offering pay-by-cash incentives to their customers because their contracts with credit card companies disallowed such incentives. The recently passed financial reform bill includes a section called the Durbin Amendment, sponsored by Sen. Dick Durbin (D-Ill.), which focuses largely on credit and debit card transactions.

The Durbin Amendment states that credit card networks may not penalize retailers for offering discounts to customers who choose to pay by cash or check. To that end, customers can expect to see such incentives soon. (The amendment also gives retailers the option of refusing credit cards for purchases under $10, so those used to buying a doughnut with plastic may be forced to amend their spending habits. ) But even at retailers that don't offer a pay-with-cash discount, "the more transactions that take place via cash, the fewer credit card fees the retailers have to pay that end up being paid by consumers," Shearman says.

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