There’s a Fee for That: Pros and Cons of Surcharging Credit Cards

What is credit card surcharging?

Credit card surcharging is the practice of adding an extra charge to consumer purchases to offset credit card fees. Retailers add surcharges only to credit card transactions, not to cash, check or debit card purchases. This practice helps businesses recover payment processing fees and is sometimes referred to as “zero-fee” credit card processing or “free” credit card acceptance.

“As consumers move further away from using cash and debit cards, credit card volume and higher processing fees have followed,” said Eric Cohen, founder and CEO of Merchant Advocate. “Faced with rising business costs, more and more merchants are adopting surcharging programs.” 

Lou Haverty, owner of online retailer Skid Retailer, agreed that it can be tempting to pass credit card processing costs on to consumers. “If a business makes a 20 percent margin on a product sale, [a] 3 percent [fee] can start to eat into that profit margin,” Haverty explained. 

What are the pros of credit card surcharging?

Credit card surcharging can benefit a business’s bottom line in the following ways.

Credit card surcharging brings higher margins.

The obvious benefit of credit card surcharging is that the burden of processing expenses no longer falls on you. By passing merchant credit card fees to your customers, you’ll cut business costs and boost your bottom line. For businesses with thin margins, even small savings can make a difference.

Credit card surcharging can provide customer convenience.

Surcharging helps you offer payment flexibility without absorbing the cost. Part of providing a great customer experience is allowing customers to use their preferred payment method. 

According to a Federal Reserve report, 69 percent of consumers prefer using a credit card for in-person payments. Surcharging is a way to support that preference while incurring little to no cost (depending on your payment processor plan). 

Credit card surcharging may improve cash flow.

In some cases, a credit card surcharge may encourage customers to pay with cash or a debit card instead. When that happens, you may receive your revenue more quickly — often immediately for cash or faster for PIN-based debit transactions — instead of waiting one to three business days for your credit card processor to release funds.

Credit card surcharging may encourage healthier consumer spending habits.

It’s no secret that credit card issuers make money by charging interest on unpaid balances. By making credit cards a slightly less appealing payment method, you may indirectly encourage customers to use debit or cash, which could help them avoid accumulating interest charges over time. 

What are the cons of credit card surcharging?

While offsetting credit card fees is a huge advantage for businesses, surcharging has some distinct downsides.

Customers don’t like credit card surcharges.

One of the most significant potential drawbacks of surcharging is customer opinion. Your customers may dislike surcharges so much that they choose to patronize other businesses instead. According to a WalletHub survey, 87 percent of consumers feel they’re being nickel-and-dimed when merchants ask them to pay an additional fee and two in three say they wouldn’t use their credit cards in a surcharging situation.

Entrepreneur Alicia Collins, founder and CEO of K9 Activity Club, agreed that consumer pushback is a very real possibility when instituting credit card surcharges. “While it makes sense from a business perspective, customers don’t always see it that way,” Collins cautioned. “Some won’t care, some will complain and others will walk away.” Collins has seen businesses add a surcharge, only to reverse course after customer backlash.

Consumers may adapt to your surcharges after initial complaints, but if convenient alternatives exist, such as a nearby business that doesn’t surcharge, you could lose business. Cohen cited a 2024 PYMNTS study that revealed 56 percent of credit card users would likely switch to another merchant if asked to pay a surcharge.

Surcharging raises your effective prices.

If most of your customers pay with a credit card, a surcharge effectively increases your prices, putting your business at a competitive disadvantage. For businesses operating in a price-sensitive market, surcharging can hurt your bottom line because customers may decide to buy from a competitor instead.

Be honest with yourself about the competitive landscape. Ask yourself these questions:

• Are you alienating your customers?
• Are there other businesses nearby that offer the same goods or services you do?
• How will you compete with those businesses if your prices are higher when the surcharge is included?

It’s especially important to consider customer alternatives if you’re competing against online retailers that offer free shipping and fast delivery. If your products aren’t items that customers need to purchase in person, you could be costing yourself business by adding an obstacle to buying from you.

Haverty chooses not to implement credit card surcharging, citing the highly competitive e-commerce landscape. “[It’s] very easy for consumers to compare prices online,” Haverty cautioned. “My strategy is to make up for the credit card surcharge cost in sales volumes rather than directly passing the cost on to the buyer.”

In some places, credit card surcharging is illegal.

Credit card surcharging is prohibited in several states and restricted in others. If you do business in one of these areas, you could face legal trouble for adding a surcharge or doing so improperly, which may result in fines and negative publicity.

You can’t surcharge debit card transactions.

Even if a customer runs a debit card as credit without entering a PIN, you still cannot add a surcharge to the transaction. Some credit card processors automatically remove surcharges from debit card purchases. If yours doesn’t, you’ll need to manually oversee each sale, creating unnecessary extra work.

If most, or even a significant portion, of your sales come from debit cards, surcharging won’t benefit your business much and may not be worth pursuing.

Complying with credit card surcharge laws may create challenges.

Laws vary by state, but all states prohibit merchants from profiting from a credit card surcharge. (Processors can and do profit from processing fees.) Merchants are also prohibited from adding a surcharge to debit card purchases.

“The merchant must have payment systems that distinguish between credit and debit cards,” Cohen explained. “However, many current point-of-sale systems lack this functionality, creating further challenges.”

What are the steps to start credit card surcharging?

If you decide to surcharge credit cards, consider the following steps: 

1. Contact your credit card processor to inform them of your intent to surcharge. The company may impose specific requirements and restrictions that you must follow.
2. Ensure your processor reprograms your credit card terminal so that surcharges appear as a separate line item on customer receipts.
3. Notify the credit card brands, such as Visa and Mastercard, at least 30 days in advance and follow their rules regarding surcharging.

You must meet all surcharging requirements, including the following: 

• Surcharges may be applied to credit card transactions only.
• The surcharge cannot exceed 4 percent of the transaction total (3 percent for Visa) or your actual card processing cost, whichever is lower.
• You must inform Visa and Mastercard of your intent to surcharge at least 30 days before doing so.
• You must post signage informing customers about the surcharge and stating that it applies only to credit card purchases, not debit card purchases.
• Signage must be posted at store entrances and at the point of sale, including online checkout pages.
• Surcharges must be displayed as a separate line item on receipts.

“Failure to comply can result in penalties, including fines or suspension of payment processing privileges,” Cohen cautioned. “Staying informed by doing your own research or seeking assistance from an independent third party like Merchant Advocate is critical to avoid costly mistakes.”

How do you assess the impact of credit card surcharging?

To accurately assess the impact of surcharging on your business, track and analyze all relevant variables once you begin. Compare sales totals before and after implementing the surcharge to ensure you aren’t unintentionally alienating customers or hurting your bottom line.

If you begin surcharging and experience adverse effects, you can reverse the decision and stop surcharging. Still, it can be hard to change a customer’s negative perception. Carefully weigh the pros and cons of surcharging before you proceed.

Where are credit card surcharges prohibited?

Five states currently prohibit credit card surcharges: California, Maine, Massachusetts, New York and Connecticut. Puerto Rico also bans credit card surcharges. In addition, some states have limited or complex anti-surcharging laws that may restrict how fees are disclosed or applied.

Surcharging regulations change frequently, so always check with your state or legal advisor before adding surcharges to customer transactions.

What are some credit card surcharging alternatives?

Surcharging isn’t the only way to reduce credit card processing fees. Consider the following alternatives.

Offer cash discounts.

Instead of charging more to use credit cards, consider offering a cash discount for customers who choose not to pay with plastic. Price your goods or services as if everyone will pay with a credit card. That way, you’ll have room to offer a small discount for using cash.

While a cash discount has the same basic effect as a credit card surcharge, customers are generally less opposed to a discount than a fee. By offering a cash discount, you’re rewarding cash usage instead of punishing credit card usage.

Establish minimum purchase amounts.

Requiring a minimum purchase amount can encourage customers to use cash for at least some purchases or to buy more so they can use a credit card. For businesses whose credit card processor charges a percentage plus a flat fee for each transaction, you may lose money on small sales paid for by credit card. Excluding small purchases from credit card payments can reduce overall processing fees.

Requiring a minimum purchase amount is permitted in the United States and U.S. territories. Visa does not allow minimum purchase amounts in other countries.

Charge convenience fees.

Businesses can charge a convenience fee when customers use a nonstandard payment method, such as paying with a credit card by phone or online. Convenience fees are typically between 1.3 percent and 3.5 percent and may have a minimum amount. 

The rules regarding convenience fees vary by card type.

Here are Visa’s rules for convenience fees:

• Convenience fees can’t be charged for in-person transactions.
• Convenience fees can’t be charged for the general acceptance of Visa cards.
  Convenience fees must be disclosed before purchase completion.
• Convenience fees must be a flat or fixed fee, not a percentage.
• Convenience fees cannot be charged on recurring transactions.
• You may charge a convenience fee or a credit card surcharge, but not both.

Here are Mastercard’s rules for convenience fees:

• Convenience fees must be disclosed as a separate fee for using the payment channel.
• Convenience fees may be used for in-person, phone, online, kiosk or mail payments.
• Convenience fees can’t be higher than those for other card-based payments.
• Convenience fees may be a flat fee or a percentage.
• You may charge a convenience fee or a credit card surcharge, but not both.

American Express has the following rules for convenience fees:

• Convenience fees must be disclosed to the customer.
• Convenience fees must be the same for all forms of payment within the same channel (such as phone, online or mail).
• Convenience fees may be a flat fee or a percentage.
• Convenience fees may be used for in-person, recurring and installment payments.

Rules can change at any time. Check with each card brand for the most current information.

Raise prices.

Although raising prices across the board can result in slightly higher credit card fees, it can also increase your profit margin and help you avoid backlash from card-paying customers who may feel penalized. To some extent, customers expect prices to rise over time due to inflation, so a modest increase can effectively help offset credit card fees.

However, use this strategy only if your customer base isn’t price-sensitive, you offer a product with limited alternatives or you’re confident that customers won’t switch to a competitor.

Use a credit card processor with interchange pricing.

Lowering your credit card processing costs benefits both you and your customers. Not all processors charge the same way. While all credit card processors charge the interchange rate — the amount set by card brands like Visa, Mastercard, American Express and Discover — some make their money by charging a flat monthly fee instead of adding a markup on top of the interchange rate.

If your credit card volume is high, using a processor with interchange pricing can be an effective way to minimize costs. (Check out our review of Payment Depot and our Stax review to learn about two credit card processors that use the interchange pricing method.)

Sally Herigstad contributed to this article.