What you need to know about credit card surcharges

SAN JOSE, California., June 15, 2021 /PRNewswire/ — As the economy recovers from the Covid-19 pandemic and businesses reopen, don’t be alarmed if you notice something new when you complete transactions: a surcharge.

(PRNews photo/myFICO)
(PRNews photo/myFICO)

(PRNews photo/myFICO)

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What is a surcharge and why do companies charge it?

Before we get into fees, a little background on credit card processing can provide some context. One of the ways credit card networks, such as Visa and MasterCard, make money is by charging businesses. Each time you swipe your credit card, the company must pay a percentage of your transaction to all the companies that help make that transaction possible. These fees range from 1.5% to 3.5% of the transaction, depending on the network. Especially with small ticket purchases, processing costs can make it difficult for companies to make a profit.

Rather than including processing costs as a business expense, some retailers and restaurants choose to pass those costs on to customers. This is known as surcharges.

There’s a reason you haven’t seen many surcharges until now – it wasn’t always legal. A series of court decisions, including a 2017 US Supreme Court decision, made it legal for businesses to address credit card surcharges in every state except Colorado, Connecticut, Kansas, Massachusetts, and Puerto Rico.

While it is legal to add a surcharge, companies must follow some rules. They are required to show a notice of the surcharge so that customers are aware of this before completing a transaction. Companies must also state the surcharge on your receipt.

In addition to state law, businesses must also comply with card network rules. These generally require companies to apply any surcharges uniformly to all credit cards. In addition, companies must limit surcharges to the actual costs only – they are not allowed to take advantage of surcharges. Finally, the surcharge may not exceed 4% of the transaction. That means, for example, a $1 surcharge on a $10 transaction exceeds the allowed amount.

Do you still need to use your credit card?

Paying an additional fee is enough to tuck away your credit card or even take your business elsewhere. Sometimes that’s not an option, or you may be willing to pay the fee if it means enjoying your favorite shops and restaurants.

In front of rewards lovers, it may be worth paying the extra fee, especially if you can still earn the allowance. For example, if you get 5% cashback and the surcharge is only 3%, you’re still ahead. However, if the surcharge is 3% and your credit card pays out 2% rewards, it’s not worth it. And if you’re using a credit card that doesn’t pay out any rewards at all, that means you’re the one taking the credit card fees.

Surcharges can only be applied to credit cards, so having your debit or prepaid card with you as a backup is a smart move. You can choose to use your reserve payment method if you are not willing to pay the fee. Some companies even offer a cash discount instead of directly imposing a surcharge.

While you weigh your options, don’t forget the others benefits of using a credit card. Benefits such as extended warranty, purchase protection and no liability for fraud may justify using your credit card and paying only the fee. While we may be nostalgic for the days of uncomplicated pricing on our purchases, surcharges may become part of the new normal.

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