How credit card surcharges are changing consumer behavior

It’s bad enough that prices always seem to be going up. What’s worse is that in today’s economy, prices are often even higher than they seem.

In recent years, it’s become common for merchants to charge a little extra when you use a credit card to pay for something. This extra cost is known as a surcharge. It’s designed to compensate merchants for the fees they pay credit card companies for processing their transactions.

Newly released data from our CardRatings.com survey shows that most consumers have encountered these surcharges. These costs can really take a toll. Since they’re generally assessed as a percentage of the total bill, they quickly become expensive on large transactions. But even on smaller, everyday purchases, that extra fee quietly chips away at your budget day after day.

For consumers, surcharges are not just costly, but they’re also confusing. They’re subject to a patchwork of credit card surcharge rules that apply differently from state to state. Those rules are frequently changing as the battle over surcharges is fought in legislatures and courtrooms across the nation.

The new survey data gives some insight into which consumers are most affected by these surcharges, and how they’re responding.

What is a credit card surcharge?

A credit card surcharge is a fee that’s added on when you use a credit card to pay for something. It may be applied as a set dollar amount or as a percentage of the transaction.

So, for example, if a restaurant charges a 2% credit card surcharge and the bill comes to $100, you may see a line item after the subtotal that says “credit card fee: $2.” So, paying by credit card will cost you $2 more than the bill otherwise would have.

The purpose of these fees is to compensate the merchant for the interchange fees that credit card companies charge. These are fees for processing the transaction. Credit card companies have charged interchange fees for decades, but only recently has it become common for restaurants and merchants to try to pass this cost along to their consumers directly.

Previously, this would have been considered just another cost of doing business to be factored into the prices a company charges. For example, a restaurant doesn’t charge you a separate line item for the cost of their staff, or their electric bill, or insurance. One reason businesses have started singling out interchange fees is to make them more visible in their effort to lobby against the rising cost of those fees.

Besides surcharges, businesses might use other ways to get compensated for interchange fees. They might charge a “convenience fee” to customers who use a credit card. Or, they might build interchange fees into their regular prices but offer a discount from those prices to customers who pay with cash.

What’s the latest credit card surcharge news?

As surcharges have become more common, there’s been a flurry of legislative efforts to control them.

To a large extent, credit card surcharge rules are governed by state laws. This means that they can differ greatly from state to state.

According to the National Federation of Independent Business, six states have passed laws banning surcharges on credit card transactions:

• California
• Connecticut
• Maine
• Massachusetts
• Oklahoma
• Texas

Besides outright bans on credit card surcharges, several other states have rules governing how those surcharges can be implemented. Most often, states that have addressed the issue simply require a disclosure to the customer prior to making a purchase. A few states limit the amount that can be added as a surcharge.

Some of the outright bans on surcharges are being challenged in court. Meanwhile, state governments are considering other restrictions on surcharges. So, expect credit card surcharge rules to continue to change, at least in some states.

Further complicating the issue is the fact that last autumn, Visa and Mastercard proposed a settlement to a decades-long lawsuit challenging interchange fees. The settlement would pay merchants $38 billion, plus include measures that would reduce the cost of interchange fees going forward.

The proposed settlement would also allow merchants to pick and choose which of a particular issuer’s cards they would accept. So, for example, an issuer could choose to accept only non-rewards cards. Since rewards cards typically have the highest interchange fees, this would allow merchants to limit those costs.

In theory, a settlement that reduced interchange fees would lessen the need for merchants to add a surcharge to cover those fees. However, the settlement is far from certain. It still needs to be approved by the court, and merchant groups have raised objections.

In short, expect the debate over interchange fees to continue. In the meantime, consumers are increasingly shouldering some of the cost of those fees.

Survey: How are credit card surcharges changing consumer behavior?

The latest CardRatings.com Cardholder Satisfaction Survey asked over 2,700 credit card holders in the United States about their experiences with surcharges.

A majority of those shareholders, 61.6%, reported running into those surcharges. Slightly more than half of those who’ve experienced surcharges say it affects how they pay for things.

Nearly a third of consumers, 31.6%, said they avoid using their credit cards if the merchant adds a surcharge. While credit card issuers and merchants are on opposite sides of the debate over interchange fees, this change in behavior could be a loss for both sides.

For credit card issuers, having consumers choose another payment method represents lost revenue. They don’t get to charge an interchange fee on the transaction, plus they may lose revenue from potential interest on balances created by these transactions.

Merchants can also lose out when consumers act to avoid surcharges. Shoppers tend to spend more when they can pay by credit card. Worse, consumers may switch to a business that doesn’t add a surcharge, costing merchants with surcharges some customers.

Which consumers are most sensitive to credit card surcharges?

As described above, the survey found that most consumers are running into surcharges, and some are changing their behavior to avoid those surcharges. The survey also found that women and lower-income consumers are especially sensitive to these surcharges.

Women are more likely than men to change their behavior to avoid surcharges. Among consumers who said they’d encountered surcharges, a little fewer than half (46.7%) of men said they’d try to avoid using their credit cards when merchants add those fees. In contrast, over half (55.9%) of women said they’d try to avoid using their credit cards in those situations.

Besides women, lower-income consumers seem more sensitive to surcharges. For one thing, they are less likely than high-income shoppers to say surcharges aren’t a concern because they rarely encounter them. This may be because lower-income shoppers have to be more price-conscious, and thus are more likely to notice surcharges.

Among shoppers who report encountering surcharges, lower-income consumers are more likely to change their behavior in response. Most (54.2%) of those with incomes below $70,000 a year say they avoid using their credit cards if a merchant charges extra for it. Slightly less than half (48.5%) of those with incomes of $70,000 or greater say they would avoid using their credit cards in those situations.

5 tips for minimizing the impact of credit card surcharges

It’s far from certain what will happen next with credit card surcharge rules. Instead of hoping those rules change in your favor, there are five things you can do for yourself to reduce the cost of those surcharges:

1. Check before you choose your payment method. Look for signage in stores or on restaurant menus for notification of surcharges, or ask the person waiting on you.
2. Choose merchants without surcharges where alternatives are available. Get to know which establishments add credit card surcharges, and take your business elsewhere when possible.
3. Use bank transfers when paying online. Businesses that allow payments online are increasingly adding a “convenience fee” when you pay by credit card. You can often avoid those fees by transferring money directly from your bank instead. However, only do this when you are confident the business is reputable and uses up-to-date security methods.
4. Carry cash to use where surcharges apply to in-person transactions. Don’t let anyone tell you that cash is dead. The most recent Survey and Diary of Consumer Payment Choice from the Federal Reserve Bank of Atlanta says otherwise. Indeed, cash is now used in just 14% of all retail transactions. Even so, 83% of consumers report using cash at least once within the past 30 days. So people still use cash regularly, and if it allows you to avoid a credit card surcharge, you should consider it.
5. Use rewards to get compensated for surcharges. If you can’t avoid a surcharge, try using a rewards credit card for the transaction. At least that way you’ll get something back in return for the fee you had to pay.

The survey shows that many customers aren’t waiting for laws to protect them from surcharges. They are changing their own behavior to reduce the impact of those fees. With surcharges becoming commonplace, you could benefit from acting to avoid those charges whenever possible.

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