Credit Cards

Is That Credit Card Surcharge Illegal?

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Have you ever been forced to pay a surcharge just to use your credit card? A recent legal settlement between credit card processors and merchants means that these charges can now be imposed by merchants, thought they’re not legal everywhere.

Exceptions include payments to governments and all transactions conducted within the 10 states that have outlawed credit card surcharges. While these are only a fifth of the states in our country, they are home to more than half the U.S. population. In fact, the list includes the four most populous states: California, Texas, New York, and Florida.

Although not as populous, the state of Colorado has laws prohibiting merchants from adding credit card surcharges.  Yet on a recent trip to a store in Aurora, Colo., I was informed that a 50-cent surcharge would be added to all purchases, and was added to my purchase that day. I then had a polite conversation with the owner of the store. He was under the mistaken impression that the law forbid him from adding surcharges to debit cards, but permitted him to impose a checkout fee on credit card transactions. When I informed him of his mistake, he seemed genuinely surprised to learn that this policy violated Colorado law.

What Can Cardholders Do?

According to the Colorado Attorney General’s website, “it is illegal for any merchant to impose a surcharge on a purchaser or lessee who elects to use a credit or charge card in lieu of payment by cash, check, or similar means. ” Carolyn A. Tyler of the Colorado Attorney General’s office advises citizens to report violations of the law to their state’s Attorney General’s office for enforcement. She notes “when violations of the statute are found, vendors and companies are absolutely required to refund the excess surcharge and they face up to a $1,000 penalty per violation.”  She adds that since 2009, her office has received 11 complaints that were surcharge violations, and has required refunds of the excess surcharges and promises not to add surcharges in the future.

In Colorado, affected consumers can file their complaint through their telephone hotline or by using the Attorney General’s website, and other states have similar enforcement mechanisms. In my case, I chose to first speak with the owner of the store and presented him with a copy of the applicable law. After we spoke, he agreed to change his store’s policy after he verified the information I gave him.

Other Rules for Credit Card Surcharges

Even if you do not live in one of the states where these surcharges are prohibited, merchants may still be bound by the rules of the recent settlement. For example, any surcharge must not be more than the merchant actually pays to accept credit cards. This amount is typically between 1.5% and 3%, and may not exceed 4%. Contrary to the belief of the manager of the store I visited in Colorado, merchants may impose surcharges on credit cards where permitted by law, but not on debit cards. Finally, the surcharges must be disclosed clearly before the transaction, and the amount of the surcharge must appear on the cardholder’s receipt. These rules are issued by the Visa and MasterCard payment networks and do not carry the force of law. Nevertheless, cardholders can report these violations to Visa or MasterCard.

Between the recent legal settlement, existing state laws, and longstanding merchant agreements, merchants and cardholders can be confused when it comes to understanding how and when credit card surcharges are permitted. Thankfully, credit card users who have been charged illegal or prohibited surcharges can report these violations to credit card processing networks and civil enforcement agencies. But to save everyone some time and trouble, you might want to have a friendly conversation with the store’s manager first.

Image: Ryan McVay

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  • Credit Experts

    This is an excellent question and actually has more to do with interchange fees than surcharge fees. Surcharge fees are charged by the merchant. Interchange fees are charged by credit card processors — Visa, MasterCard, American Express, etc. Interchange fees are legal and they’re charged to the merchant — not the consumer.

    What most people don’t realize is that whenever you swipe your card, the merchant has to pay for the transaction — essentially, it costs them every time someone pays with credit. This fee is called an interchange fee and it varies depending on the credit card processor — (Visa, MasterCard, etc.)

    When you pay with a credit card, it costs the merchant money. When you pay with cash or debit, it doesn’t — which is why you’ll see gas stations (typically independently owned smaller stations) incentivize people to use cash rather than credit.

    By offering a cash discount, you save them money — and yourself a little too. They’re not charging you a surcharge fee — they’re just giving you a discount because they don’t have to pay the interchange fee charged by the credit card processors.

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