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What are credit card surcharges and where are they legal?

November 29, 2022, 6:09 PM UTC
Photo illustration of credit cards as arrows pointing up on a diagonal to the right.
Credit card surcharges are becoming more widespread. But they’re not legal in every state and there are specific rules about how they’re to be implemented.
Photo illustration by Fortune; Original photo by Getty Images

The COVID-19 pandemic triggered a variety of changes in our daily lives, including a further shift away from using cash to pay for purchases and a greater reliance on contactless forms of payment such as credit cards and debit cards. In fact, many merchants stopped accepting cash altogether during the pandemic, and continue to follow such policies.

This reality caused a significant spike in the number of credit card transactions taking place in the United States. According to November data from the Nilson Report, consumer and commercial credit, debit, and prepaid general-purpose cards generated $9.7 trillion in transactions in 2021: a 22.5% increase over the previous year. 

Along with all of the increased credit card usage, there’s been an uptick in surcharges—which are fees that payment processors and credit card companies charge merchants and retailers. For a long time these fees were not felt by consumers, but between the increased number of customers paying with a credit card and the rise in the cost of doing business in recent years, surcharges are becoming far more commonplace as a way to help merchants cover their own expenses. 

What is a credit card surcharge?  

A surcharge is an extra fee that a business or merchant adds to the price of a purchase when payment is made using a credit card instead of cash. The surcharge is often a percentage of the overall purchase cost and can range from 1% to 4%.

These fees began to be passed on to consumers in 2013, following a class-action lawsuit that businesses and merchants brought against Visa and Mastercard in response to such costs. As part of the lawsuit settlement, the surcharge fees merchants had historically been charged by credit card companies and payment processors could be passed to consumers.

“Prior to 2013, any charge added solely for acceptance of a credit card was prohibited by the card processor rules and requirements,” said Jeff Fortney, senior associate with the Strawhecker Group, a payments consulting company. “The changes occurred in response to the class-action suit settlement. The card processors agreed to allow a specific structure for fee assessment at time of sale. This structure is the basis of today’s surcharge programs.”

That surcharge structure allows merchants to add fees as high as 4% to consumer transactions—though the exact amount charged varies from business to business and based on the specific type of card being used to make the purchase.

“Merchants accepting credit cards as a form of payment to their business must pay credit card processing fees such as interchange and discount costs, which vary on each credit card,” said Jennifer Vartanov, chief financial officer for Merchant Industry, a credit card processing company. “When a merchant intends to surcharge, they are offsetting the costs that they would be paying by applying a surcharge to the transaction. The name ‘surcharge’ is to advise consumers that there is an added fee—which is the cost of accepting the credit card they are presented with—to their total checkout amount.” 

Rules and regulations surrounding surcharges 

While adding surcharges to the cost of a purchase is now legal in nearly all states, businesses and merchants must follow rules regarding how such fees are implemented. In addition, each credit card brand has its own rules that merchants must adhere to. Some of the guidelines include:

  • Clear disclosure of fees prior to transaction. To begin with, surcharges must be made clear by the merchant prior to a sale. “Signs must be posted at the cash register or point of acceptance,” explained Fortney. “The sign must clearly state that a fee of X% will be added on to any payment made with a credit card at time of the sale.”
  • Surcharges must be listed on receipts. The surcharge must also be disclosed on the receipt for a purchase or transaction. Receipts must include the percentage of the surcharge and also the dollar amount of the surcharge. “The surcharge added fee must be clear on all receipts to be compliant with surcharging rules for the card brands,” says Vartanov.
  • Cap of 4% on surcharges. The surcharge that merchants pass on to consumers cannot exceed the cost merchants are charged by credit card payment processors. The current cap on these fees is 4%. “In some cases, the processor will reduce the cost if the merchant balks at 4%,” said Fortney. “But it’s very rare for a surcharge to be less than 2.5%.”
  • No surcharges for debit cards. Debit cards are excluded from surcharges. Merchants are prohibited from assessing surcharges on cards that are linked to a bank account. “These are commonly classified as debit cards, but they can be branded like a credit card,” said Fortney. “No matter how the transaction is handled, a fee cannot be charged for their acceptance.” 

Places that prohibit surcharges  

While surcharge fees are legal under federal law, there are a few states and one jurisdiction that prohibit surcharges, according to the National Merchants Association.

The laws in Connecticut, Massachusetts, and Puerto Rico do not allow merchants to impose surcharges. Colorado was in that group until 2021, when it repealed its prohibition of surcharges. The state now allows merchants to add a surcharge of up to 2% of the total cost of a transaction.

How can you avoid credit card surcharges?

As a consumer, you have options to avoid surcharges. These include using cash instead of a credit card to make a purchase, or using a debit card, for which surcharges cannot be applied. You can also choose to shop at businesses that do not charge these fees.

“Since signage is required at the business entrance, the consumer can choose to shop elsewhere,” said Fortney. “The merchant should also have the ability to waive a surcharge if they wish. It’s rare, but in certain circumstances a merchant may choose to waive the surcharge.” 

If a merchant has a long-term relationship with a customer or is an ongoing supplier for a customer, then the fee may be eliminated, explained Fortney. 

The takeaway

Surcharges are an added cost of making purchases and can be as high as 4% depending on the merchant and the credit card being used. If you’re making a significant purchase, it’s important to factor this expense into your overall cost. You can also avoid these fees by shopping around and finding out in advance whether a merchant implements surcharges.

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