Retailers are no doubt popping open the champagne to celebrate the Department of Justice’s settlement of a lawsuit challenging rules that American Express, MasterCard and Visa have in place to ”prevent merchants from offering consumers discounts, rewards and information about card costs, ultimately resulting in consumers paying more for their purchases.”

Merchants have been complaining for years that the fees they pay the credit card companies every time they accept a credit card are too high. These interchange fees amounted to about $35 billion last year. Merchants have filed numerous lawsuits alleging “price fixing,” among other things, over the years, and there have been various attempts to regulate the industry through legislation. For the most part they have been unsuccessful, though the “Walmart case” and the recent “Durbin Amendment” in the Wall Street Reform legislation both opened the door to lower debit card transaction fees. But the rules for credit card purchases remained pretty much untouched.

This settlement changes that. According to a DOJ press release, the proposed settlement requires MasterCard and Visa to allow their merchants to:

• Offer consumers an immediate discount or rebate or a free or discounted product or service for using a particular credit card network, low-cost card within that network or other form of payment;

• Express a preference for the use of a particular credit card network, low-cost card within that network or other form of payment;

• Promote a particular credit card network, low-cost card within that network or other form of payment through posted information or other communications to consumers; and

• Communicate to consumers the cost incurred by the merchant when a consumer uses a particular credit card network, type of card within that network, or other form of payment.

So what does this really mean for consumers? We don’t know yet, but I see a number of possible outcomes:

Lower Prices at the Cash Register

Merchants have long maintained that interchange fees are a “hidden tax” on consumers, and that if they were lower, they could pass along the savings by lowering prices. Of course, the savings could also be used to bolster balance sheets and increase shareholder value. However, it is possible you’ll start seeing promotions, discounts or rewards from merchants who want to encourage consumers to use particular cards.

I am not getting too worked up over this yet. The reason businesses accept cards in the first place is that they want to make sure as many customers as possible can buy their products and services. That won’t change. And pinpointing certain cards for discounts may not be as easy as it sounds. As a paper by the Kansas City Fed pointed out, "In reality, merchants do not know their own fee level of a particular transaction due to the complex interchange/merchant fee structures."

Merchants will have to walk a fine line between encouraging the behavior they want from customers without driving away business.

Higher Rates and Fees

The industry has warned that lower interchange will result in higher costs to consumers. That, too, remains to be seen. In a report for the Minneapolis Fed, James M. Lyon noted that after interchange fees were lowered in other countries, some consumers experienced higher annual fees (in Australia and Spain), shorter grace periods and less generous rewards programs (in Australia). He also noted, though, that when interchange fees were lowered in the U.K. “both annual fees and introductory rates remain relatively low.”

This one does concern me. Keep in mind that this action is coming on top of the CARD Act, and on the heels of the so-called Durbin Amendment that will lower interchange fees on debit cards. Card issuers and the card companies have already seen some of their most lucrative revenue streams slow down or dry up, so it’s not a stretch to imagine this will put further pressure on them to come up with other ways to make up for that lost income.

Reduced Rewards Programs

Convenience users, those who pay their bills in full each month, are largely subsidized by interchange revenue, a portion of makes its way back to card issuers. That’s why card issuers try so hard to get their customers to use their cards often. More purchases mean more interchange revenue. So it’s not a stretch to conclude that lower interchange revenue could make these cards less profitable, and possibly less attractive to card issuers, which in turn could mean higher fees. Keep in mind that issuers are not allowed to charge inactivity fees – including annual fees for consumers who don’t reach a certain spending threshold. So issuers will have to either focus on incentives that drive volume larger for these cards, or consider other pricing structures.

Wider Acceptance

When I shop at Sam’s Club, I have to either used a PIN based debit card, cash or a Discover Card. Could this change mean wider acceptance among discount clubs like Sam’s – or smaller retailers – who have shied away from accepting credit cards in the past? It’s conjecture on my part, but since I am speculating anyway, I might as well throw this possible outcome into the mix.

There is no question that something had to give here. Business owners have a legitimate reason to revel in this victory. But for consumers, whether this will ultimately prove to be a boon is less clear.

Photo credit: iStockphoto

Watch your mailbox. You could be getting applications for small business credit cards – even if you aren’t a business owner. A recent Wall Street Journal article points out that card issuers appear to be increasing their marketing of business cards – even to consumers who work for someone else. Sometimes camouflaged in vague terms like “professional” cards, these cards come with a serious disadvantage for the cardholder:

That means issuers can raise rates with little advance notice (and apply them retroactively), charge higher penalty fees, play with floating due dates, and do all those fun things they used to do with consumer credit cards before those tactics were outlawed. 

So why on earth would anyone want a small business credit card? Believe it or not, there are a few good reasons:

Business Card Pros:

Protect your personal credit scores. With the notable exception of Capital One, which has chosen to report business card activity on personal credit reports, most business credit cards aren't reported on personal credit reports unless you default. That means if your business can't afford to pay the bill in full each month, the fact that you are carrying a balance won't weigh down your personal credit scores. (Speaking of credit scores, you should expect to see an inquiry on at least one of your personal credit reports, since most of these cards require a personal credit check.)

Separate your business and personal finances: If you actually do own a business, keeping your business and personal purchases separate can be crucial for tax purposes. Having a dedicated business card makes this easier, though another alternative would be to use a personal card strictly for business purchases. Again, though, the activity on a personal card affects your personal credit scores, for better or for worse. 

Rich rewards:  You may find richer rewards on some small business credit cards. American Express, for example, is well known for both catering to small businesses, as well as offering solid rewards. The CitiBusiness AAdvantage Visa card gives 30,000 AAdvantage bonus miles if you make $750 in purchases the first four months. That's not hard to do if you are funding a new business.

Business Card Cons

Open yourself to the old tricks and traps. You can read our Consumer Guide to the Credit CARD Act here if you want more details about the practices that Congress banned on consumer cards. But I'll say it again: The CARD Act does not apply to business accounts. And that includes cards marketed to non-business owners as “professional” cards – at least for the time being. (I can see the new Consumer Financial Protection Bureau having fun with this one.)

Note: Bank of America has stated they will extend many of the Credit CARD Act provisions to their business cards. A Capital One spokesperson is quoted in the WSJ article as saying that Capital One has applied many CARD Act protections to its business cards, but when I look at their web site, their card offers still list penalty fees that are now illegal on consumer cards.

We've said it before and we'll say it again. Just because the CARD Act protections are in place doesn't mean we can rest easy. There are still plenty of traps to watch out for.

 

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of a new ebook, Business Credit Success: Get on the Financing Fast Track.

 

You see a small charge on your credit card you don’t recognize.

What do you do?

Small charges you don’t recognize can be a sign of a bigger problem. The New York Times takes a look at a lawsuit filed in March by the Federal Trade Commission, which claims that during the past four years, scammers raked in more than $10 million by putting small bogus charges – ranging from twenty cents to $9 – on consumers’ credit and debit cards. And in a scheme that apparently has dragged out for more than a year, scammers have made fake $1 purchases on iTunes customers' accounts, only to follow up with increasingly larger ones, sometimes totaling hundreds of dollars.

An unknown charge could mean your account was compromised. Or it could just be that you don’t recognize the name of the company billing you for a purchase you made. After all, merchants have a limited number of characters with which to describe their products and services on statements, and those descriptions can be cryptic.

So what should you do when you find an odd charge on your credit or debit card statement? Here’s how I would handle it:

1.    Call the merchant to find out whether the charge is for an item you actually purchased. If the phone call doesn’t clear it up,

2.    Call your credit card company and file a dispute.

3.    If you believe your card number has been compromised – especially in the case of a debit card – cancel the card and ask for a replacement with a new number.

Remember, under the federal Fair Credit Billing Act, the most you can be held liable for is $50 in unauthorized purchases, and that's only if the card was physically presented in the transaction. Most card companies won't even hold you responsible for that if you notified them of the fraud promptly.

However, you have to read your statements to identify fraudulent charges – especially the small ones that are easy to overlook.

We're wrapping up our week long series on the Credit CARD Act.  For those of you just joining us, we've been gearing up for the final changes that are scheduled to go into effect on Aug. 22.

So far we've covered all of the major provisions that have gone into effect to date, including what you need to know about interest rates and account changes, fee restrictions, student protections, and enhanced consumer disclosures.

• Credit card issuers are required to mail your statement at least 21 days before your payment is due and your monthly due date must be the same date each month.


• Double-cycle billing, or the practice of calculating interest charges on both the current balance and the previous month's balance, is prohibited.


• Any payment over the minimum balance due must automatically be applied to the highest interest balance first.

What you need to know: Before a credit card issuer can open a new account, they must first take into account your ability to repay. A card issuer cannot open a new credit card account, or increase an existing credit limit, unless they first consider your ability to make the required payments under the terms on the account.

There's no question that the CARD Act is a great step forward for consumer protection, but we have one final phase left to go. The remaining provisions will go into effect on August 22, 2010, and include the final rules that limit fees on gift cards and also gives consumers the right to earn back their previous interest rate if they are able to make continuous on time payments for 6 months.  Join us on Monday, where we'll review the final provisions and wrap up the final chapter in this series.