Can a merchant charge a fee for paying by credit card? Here’s what you should know

May 29, 2022

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Have you ever had that surprise moment at a cash register where you’ve pulled out your credit card, ready to pay, and then the cashier announces there is an extra fee for paying with a credit card?

People have varying reactions to this experience. One of those reactions may include wondering whether this fee is legal or whether the payment processing network allows these fees.

In this guide, I’ll walk you through the types of fees you may encounter with credit card payments — and their legality.

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Types of credit card fees charged by merchants

Person Tapping to Pay with Credit Card
(Photo by Jacob Lund/Shutterstock)

U.S. merchants won the right to start charging fees on credit card payments on Jan. 27, 2013. This came after a class-action lawsuit by merchants who wanted to charge fees to compensate for increasing credit card processing fees.

In order to understand the fees, why merchants charge them and when they apply, you should first understand a few terms. You may see these fees referred to as “interchange fees,” “swipe fees” or “credit card processing fees.” All of these terms refer to the same thing: the fee that a business incurs when accepting credit card payments, which must be remitted to the credit card processing network. What’s a credit card processing network? Think Visa or American Express — the actual network that processes the credit card transaction.

Related: How credit cards work

It’s also important to note that we are only talking about fees on credit card transactions. These fees do not apply to transactions using debit or prepaid debit cards — even if those cards are backed by a credit card network like Visa or Mastercard. When transactions are processed as “debit,” adding fees is prohibited by the card issuers and is illegal throughout the U.S. Fees related to these transactions are controlled due to the Durbin Amendment of 2011.

Processing fees

A merchant incurs processing fees when accepting credit card payments. These fees (and the fact they continue to increase over time) provided the catalyst for the lawsuit we mentioned.

Credit card processing fees are around 2% of a transaction. On a $1,000 purchase, the business must pay $20 to the payment processing network for the card used by the customer. Note that 2% is an average, and fees incurred on transactions with American Express and Discover cards tend to be the highest. Despite having higher fees on certain cards, merchants are not allowed to encourage customers to use certain credit cards at the expense of competing credit cards. A business must either accept or not accept cards from a particular issuer without telling clients that certain cards are preferred.

These interchange fees add up, so businesses looking to reduce costs and save money want to avoid these fees on credit card transactions. That’s because the fees can eat into the company’s profits. One way to avoid losing money on these fees is not accepting credit card payments. Another option for businesses is levying a fee when customers pay by credit card.

Credit card surcharges

To be clear, credit card surcharges are an optional fee that businesses can choose to add to transactions when customers pay by credit card. Merchants are not required to charge you a fee for paying by credit card. Visa recommends merchants consider what impact this might have on customers and what competing businesses are doing before charging these fees.

Credit card surcharges are legal in the U.S., except in states which prohibit them (more on that below). If a business chooses to add a credit card payment surcharge, it must clearly disclose the fee before you pay as a separate line item on the receipt. Additionally, both Visa and Mastercard require businesses charging these fees to provide notice at least 30 days in advance of implementing a credit card processing fee for customers. Businesses levying these fees are also required to post a written notice at the point of sale to alert customers.

Credit card surcharges can come in two forms:

  • Brand fees: This is a fee specific to certain credit card processing networks, such as charging a fee only when a customer pays with an American Express card.
  • Product fees: This fee relates to certain types of credit cards, such as Visa Signature or World Elite Mastercard.

A merchant can add either type of surcharge, but not both. Additionally, the maximum surcharge is 4% of the transaction amount or the cost of accepting that credit card as a payment method — whichever is lower. That’s even if the final cost of accepting this particular credit card for this particular transaction winds up costing the business more than the amount of the fee.

Credit card convenience fees

Card issuers and payment processing networks have varying policies on credit card fees:

  • American Express: Only government agencies, educational institutions, utility companies and rental establishments can charge these fees.
  • Discover: Merchants cannot charge convenience fees to Discover cardholders unless the merchant charges the same fee to all credit cardholders from all card issuers.
  • Mastercard: Only certain government agencies and educational institutions can charge these fees.
  • Visa: Merchants can add fees on nonstandard payment methods, except in states that prohibit this fee on income taxes.

There are also other convenience fees that businesses can charge, and these are not necessarily related to paying by credit card. A perfect example is a fee for paying outside the normal payment method a business typically accepts. We see this with airlines that charge a phone center booking fee. The standard method of payment for the airline is via the website, so paying in a different channel may incur a fee.

It’s important to note that none of these fees can be assessed unless another payment method is available without a fee. This may be cash, debit card, check — or buying your ticket on the website in the airline example.

Related: Credit card economics: A look at the fees that you rarely see

Minimum purchase requirements for credit card transactions

(Photo by Maskot/Getty Images)

Because of the fees associated with credit card transactions, another option for businesses is requiring a minimum purchase amount for credit card transactions. This option avoids upsetting customers with an additional fee but allows the business to not accept credit cards on smaller transactions. This is because businesses may see it as “not worth it” to pay the fee for accepting credit cards on smaller transactions.

If a business sets a minimum purchase amount for using a credit card, there is no requirement to disclose this minimum in advance. However, state regulatory agencies and credit card processing networks encourage businesses to do so.

Moreover, the minimum transaction amount must be under $10, and most businesses are not allowed to set a maximum transaction amount. The exceptions are federal agencies and higher education institutions, which are permitted to establish transaction maximums.

This applies only in the U.S. and U.S. territories, however. In other countries, setting minimum purchase amounts is not permitted.

States that prohibit these fees

photo shows U.S. flags in the foreground with the Capitol Building in Washington, D.C. in the background
(Photo by Joe Raedle/Getty Images)

There are currently two states with active laws prohibiting these fees: Connecticut and Massachusetts.

That’s not to say that other states don’t have similar laws. However, several of these have been struck down by federal courts as unconstitutional. Other similar laws have been challenged and seen states stop enforcing them to avoid protracted legal battles.

Offering discounts when paying by other methods

photo shows people and cars at a gas station, with a sign displaying prices in the foreground--including a discount if paying cash
(Photo by Frederic J. Brown/AFP/Getty Images)

Every U.S. state allows businesses to offer discounts when customers pay by methods that don’t incur fees for the business. This includes cash and checks.

You have likely seen this in practice at gas stations. The sign outside displaying the price of fuel may include one price for those paying with cash and another (higher) price for those paying by credit card.

In every state, merchants must clearly display the discount in advance. Additionally, there is a limit on the amount of the discount: 5% in most states.

Related: Gas price shock: Here are 5 ways to save at the pump

What to do if you encounter an illegal or exorbitant credit card payment fee

If you encounter a fee that you believe is illegal — because it was not fairly disclosed, it seems exorbitant or the business is not allowed to charge it — what should you do?

You can notify the card payment processing network so that it can investigate. Additionally, you can file a complaint with the relevant state’s attorney general to investigate whether a merchant is violating laws or consumers’ rights.

Related: Should I pay with a rewards credit card even if it incurs fees?

Credit card payment fees in other countries

(Photo by Richard-Drury/Getty Images)

If you’re wondering whether it’s legal for merchants in other countries to add fees when customers pay by credit card, here’s a small sample of how other countries approach this topic.

Several countries allow for credit card surcharges similar to the U.S. These include Australia, Canada, Mexico and New Zealand. Additionally, laws in Russia and numerous countries throughout Asia permit merchants to charge a convenience fee for paying online by credit card.

On the opposite side, Brazil’s Central Bank strictly regulates fees that merchants can be charged by the card processing networks, keeping the fees low and thus resulting in high use of card payments. In the European Union, Payment Services Directive (PSD2) of November 2015 prohibits businesses in member countries from charging consumers extra fees when paying by credit or debit cards. A similar law applies in Switzerland. In the United Kingdom, the Consumer Rights (Payment Surcharges) Regulations 2012 prohibit a merchant from charging a fee beyond that incurred during the transaction.

Bottom line

It can be frustrating when you pull out your credit card to pay for something and then find out there will be an extra cost for doing so. Whether a merchant charges these fees, and how they are assessed, can vary due to local laws and the various options permitted by the payment processing network.

If a merchant wants to charge you a fee for paying by credit card, consider how much that fee is and compare that to the value of the rewards you would earn from the transaction. You should also consider whether you are willing to pay more money for an item just to earn rewards on the purchase. This decision will vary from person to person and the value placed on the points that can be earned during the transaction.

Featured photo by Gary Friedman/Los Angeles Times/Getty Images.

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