What to Know About Credit Card Surcharges
Some businesses have started adding a surcharge to credit card transactions to offset processing costs. Here's what you should know about the fee.
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As the economy recovers from the Covid-19 pandemic and businesses start to open back up, don't be shocked if you notice something new when you're completing transactions—a surcharge.
What Is a Surcharge and Why Do Businesses Charge It?
Before we dive into surcharges, having a little background on credit card processing can provide some context. One of the ways credit card networks, like Visa and MasterCard, make money is by charging fees to businesses. Every time you swipe your credit card, the business has to pay a percentage of your transaction to all the companies who help make that transaction happen. These fees range from 1.5% to 3.5% of the transaction, depending on the network. With small-ticket purchases especially, processing fees can make it difficult for businesses to make a profit.
Rather than absorbing processing fees as a cost of doing business, some retailers and restaurants are choosing to pass those fees along to customers. This is known as surcharging.
There's a reason why you haven't really seen much surcharging before now—it wasn't always legal. A string of court decisions, including a 2017 U.S. Supreme Court decision, made it legal for businesses to tack on credit card surcharges in every state except Colorado, Connecticut, Kansas, Massachusetts, and Puerto Rico.
While it's legal to add on a surcharge, businesses still have some rules to follow. They're required to display a notice of the surcharge, so customers are aware of it before completing a transaction. Businesses must also include the surcharge on your receipt.
Besides state legislation, businesses also have to comply with card network rules. These generally require businesses to uniformly apply any surcharges across all credit cards. Additionally, businesses must limit surcharges to actual costs only—they aren't allowed to profit from surcharges. Finally, the surcharge can't exceed 4% of the transaction. For example, that means a $1 surcharge on a $10 transaction is above the allowed amount.
Should You Use Your Credit Card Anyway?
Having to pay an additional fee is enough to make you tuck your credit card away or even take your business elsewhere. Sometimes that's not an option, or maybe you're willing to pay the fee if it means enjoying your favorite stores and restaurants.
For rewards enthusiasts, it may be worth it to pay the additional fee, especially if you can still out earn the surcharge. For example, if you're getting 5% cashback and the surcharge is only 3%, you'll still come out ahead. However, if the surcharge is 3% and your credit card pays 2% rewards, it's not worth it. And using a credit card that doesn't pay rewards at all means that you're the one absorbing credit card costs.
Surcharges can only be applied to credit cards, so carrying your debit or a prepaid card with you as backup is a smart move. You can opt to use your backup payment method anytime you're not willing to pay the surcharge. Some businesses even offer a cash discount rather than directly imposing a surcharge.
As you're weighing your options, don't forget about the other perks of using a credit card. Benefits like extended warranty, purchase protection, and zero fraud liability may justify using your credit card and just dealing with the fee. While we may be nostalgic for the days of straightforward pricing with our purchases, surcharges may become part of the new normal.
LaToya Irby is a financial writer with over 14 years of experience. She's been quoted and published as a credit expert in several major publications including USA Today, U.S. News and World Report, TheBalance.com, and The Chicago Tribune.