Why vendors charge extra when you pay with credit card

Shoppers everywhere are accustomed to doing “mental math” before checkout: a quick accounting of how much the total purchase will cost and how much you’ll need to pay. You’ll decide if you want to pay with cash, credit, or debit.

If you opt to utilize your credit card, sometimes, the final tally comes out higher than expected thanks to sales tax and a pesky credit card surcharge fee.

What is a credit card surcharge?

You may not be aware of this, but it costs businesses money to accept credit cards. Credit card companies charge between 1-3% of the total transaction to “process” the charge. It’s a nuisance to business owners, but since almost all consumers utilize some form of credit or debit card these days, it is an unavoidable expense. In order to recoup the cost of processing, some businesses turn around and add the credit card surcharge to a customer’s payment.

Are credit card surcharges legal in every state?

No, credit card surcharges are not currently allowed in the following states:

• Colorado
• Connecticut
• Kansas
• Massachusetts

The good news: even in the remaining majority of states where surcharges are allowed, there are many rules merchants have to follow in order to charge them to customers.

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What rules do merchants have to follow with credit card surcharges?

First, there are a few things to know about surcharges. Mainly, a customer can never be “blindsided” by this fee and it shouldn’t be prohibitively expensive.

• Surcharges are capped at 4% of the total transaction. (Although, the average businesses charge is typically somewhere between 1-3%)
• A “notice” that customers will be assessed a surcharge must be clearly posted on both the business’ entry and point of sale.
• A surcharge must be a separate line item on the receipt.

Often, many businesses accept the 1% fee from card processors as just the “cost of doing” business and do not pass this expense along to customers. Or, they won’t take certain types of cards (American Express, for example), or only pass along a surcharge if a customer wants to use a certain type of card where the processing fee is higher than average.

It is also completely legal for a business to impose a minimum charge for customers who want to use a credit card for payment. And often this “credit card minimum” helps the business offset any fees associated with credit card processing without adding an additional surcharge.

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Can credit card rewards pay for surcharges?

The short answer is no, credit card rewards don’t “pay” for surcharges, but they do come with other perks that can either offset surcharge costs or make the cost of using the card negligible in comparison. The key is in finding the right rewards card for your lifestyle and the way you spend money: either via travel miles, cashback, or points for purchases like hotel stays and gift cards.

The best way to find out the true “cost” of a credit card is to do the math before you apply.

• For example, a travel card with a well-known processor has an annual fee of $179
• Perks include one airline mile for every dollar spent and a companion travel pass (worth around $300)
• Factoring in the $10,000 worth of minimum spend, an average surcharge of 1% would cost $100 for the whole year.

With the annual fee plus the potential surcharges ($279 total), the companion pass alone makes the card still “worth it.” That number also doesn’t include any additional miles earned or how valuable free travel is to the individual consumer.

It’s a bit of homework, yes, but the last thing you want is a card that costs you money out of pocket, or that doesn’t deliver on its value.

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The bottom line

• Some businesses do pass along a surcharge to customers for processing credit card payments, but these aren’t common, and laws do vary by state.
• You will always know before you buy if you are being assessed a surcharge.
• Credit card rewards do not pay for surcharges, but the value of rewards may make any surcharges incurred negligible.
• Always do your homework before signing up for a rewards card.

Essentially, surcharges shouldn’t keep you up at night unless you live in a state where many small businesses assess these fees as a standard practice. You can also question any time a merchant attempts to assess a surcharge, particularly if you live in a state where they are banned.

At the end of the day, surcharges also shouldn’t discourage you from utilizing credit cards, particularly if they come with rewards that can make the dollars you already spend (groceries, gas, utilities) go further.

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