Businesses and Credit Card Convenience Fees
With an increase in direct deposit payments, debit cards, and credit cards, fewer and fewer people are using cash and checks for transactions. If you're reading this, chances are you're one of those who prefers to pay for transactions with plastic. So when you're making a credit card payment to a business—online or by the phone perhaps—you might be shocked to find that they're charging a credit card convenience fee. Is this legal? Are businesses allowed to charge a convenience fee to customers who just want to use their credit cards?
Credit Card Convenience Fees
A convenience fee is a fee that a business charges customers who use credit cards rather than another form of payment that's standard for the business. For example, a business that traditionally accepts check or ACH for transactions has offered credit card payments as a convenience may charge an additional fee for that convenience.
Convenience Fees vs. Surcharges
Credit card convenience fees and surcharges are often used interchangeably, but they're not the same thing. A surcharge is a fee charged to customers simply because they're using a credit card. Merchant credit card agreements discourage merchants from charging surcharges on transactions. Moreover, surcharges are illegal in California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, Texas, and Puerto Rico.
While credit card issuers aren't allowed to charge a surcharge on credit card transactions, they are allowed to offer a discount for customers who pay with cash. You may have noticed some gas stations, for example, have one price set for credit card payments and a slightly lower, discounted price for cash transactions. This practice is allowed.
Why Businesses Charge Convenience Fees
While credit card convenience fees are a nuisance and additional expense for consumers, businesses that charge the fee often have a legitimate financial reason for charging the fee.
It actually costs money for businesses to process credit card payments. Credit card processing companies charge a fee on each credit card purchase businesses make. Businesses also have to pay for the software and hardware for processing credit cards.
Businesses that routinely accept credit cards typically build the cost of the accepting cards into their prices. This is especially true for businesses like major retailers that routinely sell products and services directly to the public. Other businesses bill you directly only for the cost of certain services you've used. These businesses don't pad credit card processing costs into the price you're charged.
Utility companies, landlords, and government entities, for example, often bill you directly for the amount you owe. With these businesses, it's likely free to pay by check or ACH. But, if you want to use a credit or debit card to take care of your bill, you may have to pay a convenience fee.
Who Decides Whether Credit Card Issuers Can Charge Convenience Fees
Merchants who accept credit cards are bound by the agreements they have with the credit card networks. These agreements outline the various things merchants can and can't do when they're accepting credit cards. Credit card processing networks, i.e. Visa, MasterCard, American Express, and Discover, have varying rules about whether merchants are allowed to charge a convenience fee.
- Visa, allows convenience fees, but generally only when the payment takes place across an alternate payment channel, like by phone or online; when the customer is informed of the fee ahead of time; and the merchant charges a flat rate, not a percentage of the transaction.
- MasterCard allows government agencies and educational institutions to charge a credit card convenience fee as long as they also offer other payment channels.
- American Express allows convenience fees for certain types of transactions as long as the customer's use of a credit card is actually a convenience. Any convenience fee must be disclosed before it can be charged to the customer.
- Discover doesn't have a policy on credit card convenience fees. Instead, the credit card issuer only requires that merchants treat all credit cards the same. That means merchants can't charge a convenience fee on Discover credit card transactions, but not on Visa transactions.
Convenience fees may also be charged on debit card transactions, since these cards are often processed the same as credit cards when used online, over the phone, or in payment kiosks. (Debit cards are only processed as debit, across the debit card network, when a PIN is entered.)
What You Can Do About Convenience Fees
If a company is charging a legal credit card convenience fee, consumers really only have two choices. Either pay the fee or choose another payment method.
In some cases, you may not be able to avoid paying a convenience fee, particularly if you don't have another payment method. While it's a nuisance, it's one you may have to accept occasionally, for the convenience of using your credit card. The fee won't catch you by surprise. Merchants are required to let you know ahead of time that you'll be charged a convenience fee.
Unlike other types of credit card fees, the convenience fee is included directly in the transaction. If you're making a $100 transaction and the merchant charges a $12 convenience fee, your total purchase amount would be $112. Make sure you have enough available credit or enough money in your checking account to completely cover the transaction.
Once you know a business charges a convenience fee, you can plan for it the next time you have to make a transaction with them or you can plan to use another payment method next time. For example, some businesses will process ACH transactions using your checking account and routing number without charging you any fee at all.
Convenience fees may seem small at the transaction level. For example, you may only have to pay $3 or $4. However, if you're paying multiple convenience fees each month, the fees can easily add up to more than $100 each year.