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You may have to pay a surcharge to use your credit card — here’s what to know

April 28, 2021
8 min read
Woman paying with a credit card
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Tax and tip aside, the price you see is the price that you want to pay.

In our competitive consumerist world, surcharges and hidden payments are universally loathed. A classic example? Extra fees charged for using a credit card as payment.

If you've come across a business requiring a credit card surcharge or in our COVID-19 era, a pandemic recovery fee, you're far from alone. In recent months, these practices have become more common, particularly as some merchants -- both big and small -- hunt for additional revenue amidst the pandemic.

(Photo by Sean Rayford/Getty Images)

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Whether at your local restaurant or at a hotel across the country, TPG readers and staff have told me about their experiences with card surcharges and convenience fees.

Today, I'll walk through why these pesky fees are in place at many businesses, if they're even legal to begin with and whether you should still pay with a credit card the next you come across one. Let's dive in.

Why do these card surcharges happen?

To paint a better picture of why you, as a consumer, may have a card processing surcharge imposed, we first have to take a step back and explain how credit card networks (such as Amex, Visa, Mastercard) operate from a business perspective.

One -- but certainly not the only -- major way a company such as Visa generates revenue is through merchant fees, also called interchange fees. That means every time you swipe, tap or insert your favorite travel rewards credit card, the retailer where you're purchasing the product or service is hit with this fee.

These fees range in cost depending on the card network but are typically around 1.3%-3.5% of the total transaction.

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

Passing the baton to the consumer

(Photo by Matt Dutile/Getty Images)

So here's where consumer surcharges come into play. As you might have guessed, some businesses pass these fees directly to cardholders.

Instead of the merchant absorbing the interchange fee, the customer who uses a credit card pays the processing costs. But of course, in an increasingly cash-free world, your other payment options are rather limited. And more importantly, you won't earn any valuable points or cash back.

According to Bloomberg, both Visa and Mastercard announced in March 2021 that they would delay increasing interchange fees for another year due to the ongoing effects of the pandemic. Nevertheless, more businesses have tacked on these fees as they weather COVID-19.

Each time you use your credit card, the merchant hands over a percentage of the transaction. (Photo by Neustockimages / Getty Image)

On one hand, it's easy to understand why businesses feel the need to pass on additional costs that they are also faced with. But at the same time, card surcharges can also ultimately deter sales and leave a bad impression on the consumer.

In a May 2020 U.S. study of credit card users conducted by Morning Consult and commissioned by American Express, 86% of U.S. card users said they were likely to shop at another similar business that does not surcharge if businesses they regularly visit started passing along surcharges.

It wasn’t too long ago that we saw a similar situation with merchants charging extra. Ted Rossman, industry analyst for Bankrate and CreditCards.com (owned by Red Ventures, TPG’s parent company) said, “A few years back, something similar played out with health insurance surcharges. A lot of people ended up voting with their wallets.”

What are the rules and is it even legal?

Beside being a source of annoyance for cardholders, there's the question of legality and enforcement.

State and Territory laws

Recent court rulings have almost always favored businesses, such as a 2018 decision in New York state that overturned the ban on merchants imposing credit card surcharges. This verdict, along with several others throughout the U.S., has ultimately left only four states and one territory that explicitly make it illegal to impose an extra fee for using a credit card:

  • Colorado
  • Kansas
  • Massachusetts
  • Connecticut
  • Puerto Rico

However, businesses must still conform to certain requirements, depending on the state, including full transparency of surcharges and displaying a notice at the point of sale -- whether it's a brick-and-mortar or online merchant.

Issuer rules

Additionally, each credit card company has its own rules that businesses must abide by as part of the merchant agreement.

For instance, Visa requires all businesses that impose a card surcharge to give consumers written notice at least 30 days in advance. And all of the card networks cap surcharges at 4% of the transaction. In other words, merchants can’t profit from surcharges; they can only recoup baseline costs.

How businesses sometimes skirt the rules

For starters, enforcement isn't always easy.

From a legal perspective, the prominent regulator on this topic is a state's attorney general and the Consumer Financial Protection Bureau (CFPB). But as you might expect, officials aren't likely to go from store to store to ensure laws are being followed unless there's a massive flood of complaints.

Another loophole

Additionally, merchants have always had the option to offer a cash discount on the advertised price.

While it might seem like a matter of semantics, cash discounts have always been allowed, ensuring that consumers will never pay more than what is shown. A prime example is at gas stations, where the per gallon cash price to fill up is discounted from the credit card price.

Should you still pay with credit if there's a fee?

(Photo by Popartic/Getty Images)

Clearly, if you're not paying with a rewards credit card, you're not going to earn points, miles or cash back.

But it's important to do the math and consider if those rewards are worth it. While a card surcharge of 1-2% may be worth the hit considering that TPG values some points at up to 2 cents apiece, the economics quickly doesn't make sense if fees are significantly more than that.

"Paying taxes with a credit card always costs the 2.5% credit card fee regardless of which one. I justify the extra cost by the gaining of points and convenience," TPG reader Terri Austin told me. But it's harder to justify when there are competitors to choose from.

"A local restaurant in town decided to impose a small credit card fee (during the height of COVID-19). It was a surprise 5% added onto the bill without prior notice. We paid it and told them we weren’t happy about not being notified beforehand. We haven’t gone back there since," said Donna Pairo, another TPG reader.

If you're looking to reach a sign-up or welcome bonus spend threshold, you may be more willing to pay a small surcharge to ensure you bank a large stash of points, miles or cash back.

Related: The best elevated credit card offers to sign up for this month

Using a credit card can also be better for peace of mind, including fraud and return protection. It's a payment method that's simply more convenient and easier to manage than others and of course, there's the risk of misplacing cash.

Bottom line

Depending on where you live, credit card surcharges may be illegal, but in most cases, they are valid ways for businesses to cover their costs. Consumers can show their disapproval of these fees by simply going to other competitors. However, there are times when paying the fee can be worth it.

"Most people just want to be charged a single price – they don’t like seeing add-ons for personal protective equipment, the payment method they choose, the air conditioning, etc.," Rossman added.

It all comes down to the number of points, miles or cash back earned, as well as the value you are receiving from those perks.

Featured image by Getty Images
Editorial disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

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Our points-obsessed staff uses a plethora of credit cards on a daily basis. If anyone on our team wouldn’t recommend it to a friend or a family member, we wouldn’t recommend it on The Points Guy either. Our opinions are our own, and have not been reviewed, approved, or endorsed by our advertising partners.
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TPG Editor‘s Rating
Card Rating is based on the opinion of TPG‘s editors and is not influenced by the card issuer.
4 / 5
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Rewards Rate

10xEarn 10x total points on hotels and car rentals when you purchase travel through Chase Ultimate Rewards®.
5xEarn 5x total points on flights through Chase Ultimate Rewards®.
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    Earn 80,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $1,200 toward travel when you redeem through Chase Ultimate Rewards®

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  • Recommended Credit
    Credit ranges are a variation of FICO© Score 8, one of many types of credit scores lenders may use when considering your credit card application.

    740-850
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Why We Chose It

If you are looking to take your premium rewards to the highest level, this card is really a no brainer in our eyes. Chase's Ultimate Rewards make points easy to redeem, with a wide range of 10 airline and three hotel transfer partners and a friendly user interface. Despite the high annual fee, Chase is consistently adding new benefits to keep the card competitive in a fierce premium rewards field.

Pros

  • $300 annual travel credit as reimbursement for travel purchases charged to your card each account anniversary year
  • Access to Chase Ultimate Rewards hotel and airline travel partners
  • Unlimited 3x points on the broad category of travel and dining
  • 50% more value when you redeem your points for travel through Chase Ultimate Rewards®
  • Broad definitions for travel and dining bonus categories

Cons

  • Steep $550 annual fee
  • May not make sense for people that don't travel frequently
  • You must spend the $300 travel credit before earning 3x points for travel and dining
  • No automatic hotel elite status
  • Earn 80,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $1,200 toward travel when you redeem through Chase Ultimate Rewards®
  • $300 Annual Travel Credit as reimbursement for travel purchases charged to your card each account anniversary year.
  • Earn 5x total points on flights and 10x total points on hotels and car rentals when you purchase travel through Chase Ultimate Rewards® immediately after the first $300 is spent on travel purchases annually. Earn 3x points on other travel and dining & 1 point per $1 spent on all other purchases
  • Get 50% more value when you redeem your points for travel through Chase Ultimate Rewards®. For example, 80,000 points are worth $1,200 toward travel
  • 1:1 point transfer to leading airline and hotel loyalty programs
  • Access to 1,300+ airport lounges worldwide after an easy, one-time enrollment in Priority Pass™ Select and up to $100 application fee credit every four years for Global Entry, NEXUS, or TSA PreCheck®
  • Count on Trip Cancellation/Interruption Insurance, Auto Rental Collision Damage Waiver, Lost Luggage Insurance and more