Why is there now a 4% surcharge on credit card purchases?

surcharge on credit card purchasesIf you have purchased items with a credit card in the last couple weeks you might have gotten a surprise: a 4% surcharge on your credit card purchase! Why this new charge?

First a little history. For years card issuers have charged merchants an “interchange fee” on credit card transactions. Essentially, this fee was for processing the credit card transaction. Typically the fee is around 2%. Not much on a particular purchase, but when you consider though the millions  of credit card purchases that are made every day, these fees are very profitable for the banks.

For low margin businesses like grocery stores or restaurants, these fees can take a significant bite out of their profits.

Why the surcharge

In 2005 a group of merchants filed an anti-trust suit against VISA, Master Card and 9 other companies accusing them of fixing the fees that were charged for the processing of credit cards. In the largest anti-trust settlement in US history these credit card companies agreed to pay these merchants 6 billion dollars. Additionally as part of the settlement merchants are now permitted to pass these fees on to consumers if they choose. This part of the settlement went into effect on January 27.

What you need to know

The good news is that merchants are not required to charge the fee. They are simply given the option to do so. It is expected that many merchants will choose not to.

If a merchant decides to charge these fees they are required by law to post  a sign at the entrance to their store stating credit card processing fees will be charged. The tricky part though is that these fees might be different depending on what credit card is used, and you may not know how much the fees will be until you check out.

There are 10 states that have state laws that forbid these charges. If you live in California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma or Texas, you don’t have to worry about the charges.

If you live in one of the other 40 states though and use credit cards to make purchases, this change is one you need to be aware of.

What you can do

Pay close attention. Merchants are permitted to pass these charges along but are not required to do so. It is expected that many merchants will choose not to. If you are making purchases using a credit card, pay close attention to whether the store you are visiting charges these fees or not.

First, this change applies only to credit card purchases, not debit card purchases. This is only true if you enter a pin when you use your debit card. If you sign when using your debit card then it is processed as a credit card transaction and you may be charged the fees.

Be aware that if you are anticipating things like extended warranty coverage as a result of purchasing with your credit card, you will not get  the same benefits if you use your card as a debit card.

The better solution to surcharges on credit card purchases

The better answer is to make your purchases with cash.

  1. You don’t have to pay fees when you use cash.
  2. You can’t spend money you don’t have when you use cash.
  3. It has been proven in many studies that people spend less money when using cash.

That last one is why many merchants may choose not to charge this fee. If the fee is charged then a logical consequence is fewer people will use their credit cards. Merchants know that people spend more when charging their purchases and will want to avoid those lost sales.

Will you pay these fees? Or will you change your paying method or shop at a different store?

Photo credit: 401K (2013) (creative commons)

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