The Complete Guide To Credit Card Surcharging

Like everything else these days, the cost of accepting credit cards is going up. While for many years merchants grudgingly accepted card processing expenses as ‘the cost of doing business,’ today, more and more business owners are turning to credit card surcharging as a way to pass those costs onto their customers who choose to pay by credit card.

In this article, we’ll look at current state laws and card association guidelines for surcharging and what you need to do to start adding surcharges. We’ll also discuss the limits that apply to the practice and whether it will be a good choice for your business.

If you happen to need a payment processor, be sure to take a look at our top recommended credit card processing companies for small businesses. We also have a list of the best online payment processing companies for still more options.

What Is A Credit Card Surcharge?

Surcharging is the practice of adding a small fee to a credit card transaction to cover the merchant’s costs for processing the payment. Instead of the merchant having to absorb this expense, the customer who chooses to pay by credit card pays for the processing costs that do not apply to other payment methods.

Surcharging is sometimes called “zero-fee” or even “free” credit card processing. You might have also heard of cash discounting, which is when the customer receives a discount equivalent to the cost of credit card processing if they pay in cash (or by paper check or debit card).

While both of these methods pass the cost of credit card processing onto the consumer, the only apparent difference is that with surcharging, the extra cost is added to the advertised price. Cash discounting deducts the cost from the advertised price when a payment method other than a credit card is used. For merchants, the most important distinction between these two methods is that cash discounting is legal everywhere in the US, whereas surcharging credit cards is still prohibited in a few states and territories.

Get To Know Credit Card Surcharge Laws

Before we discuss the various credit card association guidelines for surcharges, let’s address whether it’s legal to charge a fee for using a credit card — or not. You will need to check the laws for the state(s) where your business operates. Over the past several years, the number of jurisdictions that prohibit credit card surcharging has diminished as legal challenges have resulted in many laws banning the practice being overturned by the courts.

States That Don’t Allow Credit Card Surcharges

As of early 2023, only two states and one US territory still prohibit credit card surcharging. In the following jurisdictions, you won’t be able to impose surcharges (at least for now):

• Connecticut
• Massachusetts
• Puerto Rico

In these other states, anti-surcharging laws remain on the books but are unenforceable due to recent court decisions:

• California
• Florida
• Kansas
• Maine
• New York
• Oklahoma
• Texas
• Utah

If your business operates in one of the jurisdictions listed at the top of this section, imposing a credit card surcharge is illegal. However, you can still offer a discount for customers who want to pay by cash or check instead. Some people argue that this “cash discounting” is a matter of semantics, but we’ll come back to that particular point later. For now, the takeaway is that you can incentivize cash-paying customers with a discount, as opposed to discouraging card payments by adding a fee.

Limitations On Surcharging Credit Card Purchases

There’s one other limitation you need to consider: You cannot impose a surcharge on prepaid or debit cards; you can only do so on credit cards. Even transactions processed using signature debit (often called “running a card as credit”) are still debit and exempt from surcharging. That’s because of the restrictions implemented by the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Durbin Amendment specifically deals with debit transactions, including the implementation of a cap on credit card interchange fees. (Worth noting: You won’t see those savings if your processor doesn’t support PIN debit or if you are on a tiered or flat-rate pricing plan.)

Two states require additional disclosures to surcharge credit card processing fees: Maine and New York. In both cases, you must post both the cost of paying with cash and the cost of paying with a card using dollars and cents. This is on top of Visa, Mastercard, American Express, and Discover policies, which require you to post notifications at the point of sale and specify the surcharge amount.

It’s also important to note that the limitations on surcharging generally only apply to consumer businesses. Separate laws and regulations affect the ability of government agencies and educational institutions to implement surcharges, and these are allowed even in states that prohibit surcharging by consumer businesses.

So how does all of this affect large businesses that have multiple locations? If your business operates in multiple states, you can still add a surcharge in states that allow the practice — just not in the ones with bans. You’ll want to verify that you’re compliant with each state’s credit card surcharge laws as well.

Credit Card Surcharging Rules: Visa, Mastercard, American Express, & Discover

Once you’ve made sure that it’s legal to impose a surcharge in a given state, there’s still a bit of legwork and research to be done.

First, you need to consider which cards your business accepts because that will affect your policies. Do you accept Visa and Mastercard? American Express? What about Discover? Each of these card brands has set its own guidelines for merchants wanting to add surcharges for credit cards — which means you should meet all of the applicable requirements before you get started.

You’ll find out that the card associations are very firm in ensuring that you, the merchant, do nothing to discourage customers from paying with their particular card brand over other brands. (Note that this doesn’t apply to discouraging card use over other payment methods, such as cash, paper check, echeck/ACH, or debit card.) Fortunately, the overall guidelines for the networks are mostly the same:

1. You must notify the card association and your merchant services provider of your intent in writing at least 30 days in advance. (Note: American Express surcharge rules do not require you to provide notice so long as you comply with all other rules.)
2. Surcharge amounts are limited to your effective rate for credit card transactions, capped at 4% (2% in Colorado). In other words, you can’t profit from surcharges; you can only recoup your baseline costs.
3. You must post appropriate notice inside your store at the entrance and the point of sale. Similar rules apply to eCommerce businesses at the checkout page of their websites.
4. You must include the surcharge amount on the receipt as a separate line item. The surcharge must also be included in the network authorization request and settlement. (Note: American Express is the only brand with an exception to this rule.)
5. For Visa and Mastercard, you can apply brand-level surcharges (e.g., all Visa cards) or product-level surcharges (only certain lines of cards). However, you cannot do both.

Once you’ve read and understood the core credit card surcharge rules, there’s still more work to do. You must notify your merchant acquirer and the relevant card networks that you intend to start imposing a surcharge. Finally, you need to ensure that your payment gateway or processing equipment, as appropriate, is reprogrammed to accurately record the surcharges in accordance with the card network requirements.

Best Practices For Credit Card Surcharging

Now that we’ve covered the core rules, let’s take a closer look at some of the common questions that come up with surcharge processing, from how much you can charge to who you need to contact.

Should You Add A Credit Card Surcharge Policy?

Credit card surcharging has rapidly gained in popularity in recent years as court decisions and legislative changes have gradually removed legal barriers to the practice. Merchants struggling to stay ahead of rising costs have increasingly turned to credit card surcharging as a way to lower operating expenses and keep their businesses profitable.

All but a few states now allow the practice, making it a viable option for most small business owners in the US. Nonetheless, the question remains: Should you add a surcharge?

The answer to this question will depend on both your customers and what your competitors are doing. Implementing a surcharge could potentially cost you some customers. This is especially true for eCommerce merchants or anyone competing directly with big box stores — if you sell the same kind of products readily available on marketplaces such as Amazon and eBay or from Walmart or Target, adding an extra charge might send customers in search of a better deal.

That said, if your product is unique, you have a strong customer following, or you have some sort of other special value proposition, you’re less likely to feel pressure to conform to the same practices. Some businesses do have success with the zero-fee processing model.

You just need to find a good, reputable provider that can help you implement the necessary technology, either in your store or on your website.

If your merchant fees are getting to be prohibitively high, you might want to consider finding a new processor instead of resorting to credit card surcharging. If you’re on a tiered or flat-rate pricing plan, we encourage you to look for an interchange-plus pricing option, which is more affordable and transparent. (Note that flat-rate rate credit processing is actually the best option for very small or seasonal businesses due to the lack of additional account fees.)

FAQs: Surcharging Credit Cards