Here's Why Shops Don't Always Accept Credit Cards for Small Purchases

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There's a simple explanation for why retailers put minimums on credit card transactions.

If you use your credit card to pay for just about everything, then you've probably experienced transaction minimums before. You pull out your card to pay for one or two things. The cashier gives you a disappointed look and explains that the store doesn't accept credit cards for purchases under $10. Hopefully you have cash on you, otherwise you're out of luck.

But what's the big deal with paying by credit card? Is this some sort of tax-evasion scheme?

Although people sometimes think businesses do this to keep transactions under the table, that couldn't be further from the truth. The real reason has to do with what merchants have to pay to accept credit cards. Although the transaction costs you the same amount no matter how you pay, the same isn't true for the merchant.

How fees affect credit card transactions

When merchants accept credit cards, they're charged the following processing fees on each transaction:

  • Interchange fees -- These are typically a percentage of the transaction amount and a flat-rate cash fee. A standard range for interchange fees is from 1.15% + $0.05 to 2.50% + $0.10.
  • Assessment fees -- These are usually between 0.13% and 0.15%.
  • Payment processor fees -- These can be a percentage of the transaction, a flat-rate cash fee, or both. For example, the payment processor could charge a store 0.15% + $0.07 on each credit card transaction.

While these fees may not seem like much, they add up, especially as the merchant has to pay all of them for each payment. And those flat-rate fees of $0.05 to $0.10 become a lot costlier on smaller transactions.

Let's look at an example of how these fees can become a problem for small businesses. Imagine you stop by a convenience store to grab a $2 drink. On packaged beverages, convenience stores have an average profit margin of 44%. If you pay cash, that means the store would make $0.88 from your purchase.

On a credit card payment, the transaction fees could total $0.15 or more. That reduces the store's profit to $0.73 and its profit margin to 36.5%.

For small businesses with slim profit margins and convenience stores that rely on these types of small purchases, those credit card transaction fees can be a killer.

What retailers do about small credit card transactions

Retailers have two options to protect their profit margins on credit card payments: set a minimum amount for credit card transactions or add a surcharge.

If a retailer chooses the former, it can set a transaction minimum of up to $10. This is the legal limit per the Dodd-Frank Act and must be applied to all credit cards. So the merchant couldn't decide to exclusively apply the minimum to American Express cards, which sometimes have higher fees.

The other option is for the retailer to pass its transaction fees on to the consumer in the form of a surcharge. Here are the legal requirements for a merchant to do this:

  • It must clearly notify consumers of the surcharge before the transaction. A sign on the register would fulfill this requirement. The cashier telling you about a surcharge as you hand over your card wouldn't.
  • The maximum surcharge must be either the merchant's actual credit card transaction fees or 4%, whichever is less.
  • The receipt must provide the surcharge amount.

There are retailers that break these rules, often due to a lack of knowledge. What can you do if you encounter a merchant that's in violation of the rules? Start by letting them know about it. If they refuse to correct the issue, then you can contact your credit card's payment network to report the merchant.

What about debit card transactions?

Neither of the options mentioned above are allowed for debit card transactions. Merchants can't set a minimum amount on debit card purchases nor can they add a surcharge.

Again, just because there are rules doesn't mean that every merchant follows them. If a merchant tries to add a surcharge to your debit card payment or tell you that there's a minimum amount for debit card purchases, you should tell them that it's not a credit card so those rules don't apply. And if that doesn't work, then you can report the issue.

Dealing with transaction minimums and surcharges

Unfortunately for those of us who always pay with credit cards to max out our rewards, there are times when it's just not an option. Either because of transaction minimums or because it's not worth paying a surcharge.

Most retailers don't bother with either of these to avoid frustrating their customers. But if you're stopping at a small business or a corner store, it may be wise to bring some cash with you.

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