Are You Missing Savings by Paying With Plastic?

CREDIT-CARD ISSUERS HAVE given consumers plenty of reasons in this economic crisis not to pay with plastic, such as credit-line cuts and surprise rate hikes. But the best incentive is coming from retailers as more of them offer deeper discounts for paying with cash.

True, the Obama administration's credit card bill addressed plenty of consumer complaints with the credit card companies. But while cardholders were ranting about controversial industry practices such as swift rate hikes, credit line decreases, and inactive account closings, that did little for merchants, where so-called interchange fees remain a main gripe.

Indeed, almost lost in the hullabaloo is that retailers pay charges -- usually equivalent to 1% to 2% of the customer’s purchase -- to the card issuer for the privilege of using card payment networks. So when consumers pay with cash, businesses are spared those fees. And since contracts between card issuers and merchants prevent most businesses from charging a premium on customers who pay with plastic, they can't pass those fees along to you. (Merchants say the fees get built into retail prices, resulting in higher costs for all shoppers.)

However, they do have leeway to offer discounts to those who don’t pay with plastic, says Dennis Moroney, research director and senior analyst for Tower Group, a research and advisory-services firm focused exclusively on the financial-services industry. And many businesses are willing to pass those savings along to their shoppers. (Congress has ordered the General Accounting Office to study the impact of interchange fees on consumers and merchants, which could make it easier to get a cash discount in the future.)

In some cases, cash payments on the part of customers allow businesses to offer bigger discounts. For example, with medical procedures, “50% is a completely reasonable discount to get,” says Jeff Rice, CEO of health care price-comparison site HealthcareBlueBook.com.

That's because when it comes to uninsured patients and those with significant out-of-pocket costs, doctors and providers prefer cash upfront. It reduces billing paperwork and payment lag time, Rice says. At Diamond Massage and Wellness Center in San Francisco, paying with cash upfront for a rehabilitative massage session can reduce the price to $115 from $160, a 28% discount, says owner Irene Diamond.

Some businesses are increasing their cash discounts in order to retain customers (and sales) in the tough economy. New York jeweler ItsHot.com offered discounts of 5% to 10% last year to shoppers who paid by cash or bank transfer. Now that's up to at least 15%, says brand manager Inga Vascenkova. “We saw that consumers who paid with cash were more likely to exchange an item than return it,” she says.

If you can pay in cash, it’s always worth asking if the merchant will give you a discount. Here’s a sampling of businesses that offer better deals for cash buyers: