How Do Credit Card Surcharges Affect You?

Credit card usage is everywhere these days. With inflation, even those small purchases that only used to take a few bucks from your wallet have risen in price to the point that smaller things such as fast food meals are usually paid for with a credit card. However, most people don't realize that they are paying for more than that burger and fries. They are also paying a credit card surcharge. While most of the large fast-food chains don't tack on a surcharge to each purchase, they do have to make up those extra costs somewhere.

What is a Credit Card Surcharge?

Actually, credit card usage evolved from large department stores, which would offer its shoppers a card to be used in that store or chain, long before bank charge cards came on the scene. Diners Club became the first well-known card starting in 1950, with American Express offering a card in 1958.

In later years, several credit card companies became commonplace, which meant that businesses needed to be able to accept different cards to entice customers. They can deal with each credit card company individually, but this can be a hassle, and the card companies each charge the businesses for processing the transaction.

There are three ways that a credit card charge can be assessed by the issuer. One is the interchange fee, which involves a payment made to the card issuer for each transaction. Interchange fees are often higher for purchases made online, due to the higher incidence of fraud associated with online purchases involving stolen cards. This covers the card issuer for all the times it has to issue refunds to the cardholder.

Assessment fees are a charge allowing the business to use a certain card for transactions. This is usually based on monthly sales amount. This fee, combined with the interchange fee, is known as a swipe fee.

Third-Party Processors

The third fee is the payment processor fee. Large chain merchants often have their own processing departments or offer their own credit cards. For small or midsize businesses and chains, a third-party payment processor is often used. A processor is a middleman, taking over the task of processing all the payments to the various card issuers. Since some larger card issuers now charge different fees for different cards under their brand, such as using a Visa Signature vs a Visa Traditional card, using a processor makes it possible for smaller businesses to accept more kinds of cards without hassle, makes transactions go more smoothly, and may even save them a little money in the long run.

Of course, the payment processor charges a fee to process the transactions. They also often provide equipment to the merchant on a lease to use for card charges. Charges to these processors can include a monthly fee, a fee per transaction, an equipment leasing fee and a statement fee. This is how these companies make their money.

How Do Surcharges Work?

The surcharge itself is an extra charge tacked onto each purchase by the merchant to cover the cost of the processor, allowing him to accept credit cards. It's usually charged as a percentage of the purchase amount. These charges only apply to credit cards, not debit or prepaid cards, and certainly not to using cash or checks.

Most businesses these days don't specifically add a credit card surcharge to transactions. However, even if you're dealing with a business that doesn't claim to require payment of a surcharge, it doesn't mean that you aren't paying one. Businesses can just absorb these fees as part of their overhead, but since that raises the cost of overhead, prices can and are raised to cover it. While you may not be specifically paying a surcharge, you're paying for it in another way. This also means that you may be paying one in a way even if you pay by debit card or another method.

Are Credit Card Surcharges Legal?

Credit card surcharges are legal in all but a few states. Those that do allow them usually have a limit as to how much the surcharge can be as a percentage of the purchase, even if this surcharge doesn't cover their expenses in using credit cards. Businesses are required to notify customers of these surcharges, usually with some kind of signage that's easily visible. Online, the charge may be required to be added as a separate line item at checkout. Governmental agencies that allow payment of certain fees and taxes also have to comply, whether the payment is made in person or online.

There is a little twist to this process. A federal amendment to the Dodd-Frank Act does make it legal for companies to offer discounts to those customers who pay at the point of sale or within a certain time frame. This is often called a cash discount, but that doesn't mean that the payment must be made in paper money. In most businesses, this applies to prompt payment of invoices but may extend to over-the-counter purchases as well. Often a business will set a minimum amount for credit card transactions to cover their extra costs, but this must apply across the board to all cards, not one minimum for one card and a different one for another.

A convenience fee may be charged, but this is not the same thing as a credit card surcharge. These apply mostly to uncommon methods of payment, such as a business offering to take payments by phone rather than by mail or online. These fees must be made known at the point of sale.

What Businesses Use Credit Card Surcharges?

This is commonly used in smaller businesses and merchants that have local customers often paying by check, debit card or cash, and so are given payment options. However, not only merchants, but all sorts of service-based businesses can require credit card surcharges. These include the construction industry and all services related to it, legal and financial services, medical offices and individual doctors and specialists, government agencies, schools, and many others. As has been mentioned, even if a surcharge isn't specifically added to the bill as a separate item, you and others will have to pay enough to cover the extra expense to the business or person.

Most retailers and service businesses don't add on surcharges as much as in the past, so they're not as easy to avoid. This is due to fear of discouraging customers, especially those that don't understand why the extra charge is necessary. In addition, it may lose customers for a business that does add a surcharge if a competitor does not.

Even the card-issuing companies themselves discourage the practice. Some see the practice as penalizing their customers. One credit card company even asks cardholders to report any business that does add a surcharge when using their card.

With our economy moving more and more toward being a cashless society, these charges are just another fact of life for the customer and another cost of doing business for the merchant or service. It pays to shop at businesses and services that offer cash discounts instead of being concerned with these fees.