Credit Card Fees: What Are They And How Do They Work?

As a merchant, credit card fees are a cost of doing business; for consumers, they’re typically unavoidable. By offering credit cards as a payment option to customers, both online and in person, businesses reduce the friction of each sale. However, it’s important to understand the fine print of credit card fees. We’ll walk through how they work, what they mean for consumers and more.

What Exactly Are Credit Card Processing Fees?

Credit card fees are what business owners pay issuing banks, credit networks and payment service providers to process credit card transactions. Not to be confused with the fees consumers pay to carry a credit card, they’re what merchants pay to accept them.

On average, credit card fees (also sometimes called the merchant discount rate) are 1.5% to 3.5% of the total transaction as reported by CNN in March 2024. For example, on a $100 sale, a merchant would give up $1.50 to $3.50 to process the transaction. In 2023, U.S. merchants spent a total of $135.8 billion on credit card fees, according to data from the Merchants Payments Coalition.

There are three main types of credit card fees:

Interchange Fees

Interchange fees (AKA swipe fees) make up the largest chunk of the merchant discount and go to the credit card issuer (e.g., Chase or Wells Fargo). They help cover the cost of processing the payment, extending credit to consumers and offering cardholder benefits like cash-back rewards or rental car insurance.

Typically, interchange fees are a percentage of the total sale plus a flat fee, such as 1.5% plus $0.10 per transaction. However, interchange rates vary by credit card type, how it was used (e.g., swiped, inserted or keyed in) and the kind of business (AKA merchant category).

Assessment Fees

Assessment fees are paid to (and set by) credit networks (Visa, Mastercard, Discover or American Express) to cover their operating costs. Unlike interchange fees, assessment fees are based primarily on monthly credit card sales. For example, an assessment fee might be 0.15% of monthly credit card volume plus a flat fee of $0.20 per transaction.

Payment Processor Fees

As the name suggests, payment processor fees go to the payment processor (e.g., Square or Stripe) for providing the software (and sometimes hardware) to accept credit cards. Think physical card readers and online payment gateways. The payment processor fee can be a fixed rate, a percentage of the transaction or some combination of the two.  

Processing Fees Of Major Credit Card Companies

According to Forbes, these are the average processing fees of the four main credit networks:

How Do Credit Card Fees Work?

To understand how credit card processing fees work, consider the pricing model your payment processor uses:

Flat Rate

Under the flat-rate model, merchants are charged a fixed percentage of each transaction plus a small transaction fee (usually $0.20 to $0.30 per sale). This is how PayPal and Square operate, for example.

Flat-rate pricing makes it easy to predict payment processing costs. However, they may not be the most cost-effective model. For example, if a high sales volume would place you in a cheaper interchange rate tier, you won’t realize those savings. Consequently, a flat rate is best for those who have low sales volumes or prioritize the ability to easily estimate their credit card fees.

Interchange Plus

The interchange plus pricing model is the most transparent option. It charges you the exact interchange (and assessment) fee plus a markup for the payment processor. This way, you see exactly what you’re paying for. However, it also means your credit card fees vary more—by sales volume, credit network, card type and other factors.

Consequently, interchange plus is best for merchants who prioritize cost transparency over predictability. Examples of interchange plus payment processors include Helcim and Payline.

Membership-Based

Membership-based pricing models charge a recurring subscription fee (and a small, fixed fee per transaction) instead of a percentage of credit card sales. Consequently, the overall cost can be lower or higher depending on how many transactions you process.

For example, businesses that take in at least $10,000 per month via credit card may be better off with a membership plan, while those who do less should consider other options. Stax and National Processing are examples of payment processors that offer membership-based pricing.

Tiered

Tiered pricing is one of the most common pricing models. It’s typically based on three tiers: qualified, mid-qualified and non-qualified. For example, qualified cards might include those without reward programs, resulting in lower credit card fees, while non-qualified cards include those with generous reward programs, resulting in higher fees.

Naturally, merchants whose sales tend to fall into the qualified category can benefit most from tiered pricing. However, it can become an expensive option when dealing with many unqualified purchases. Popular payment processors with this pricing model include Intuit and QuickBooks.

How To Lower Your Fees For Credit Cards

Now that you understand credit card fees and how they work, here’s how businesses and merchants may be able to lower them:

• Encourage in-person transactions. They pose less risk of fraud to the payment processor (and the consumer by extension) than online or over-the-phone payments, often resulting in lower fees.
• Negotiate the best rate. Ask your payment processor for a better rate. Credit card fees are often negotiable – especially if you bring in a high transaction volume, thereby demonstrating your value.
• Switch processors. If your negotiation attempts fail, consider switching processors. This can be a hassle at first but may lead to lower fees in the long run. Shop around and compare quotes to get the best rate.
• Pass fees on to consumers. You can do this via surcharges, convenience fees or a cash discount program. However, be sure to research and follow local regulations and consider customers who may be put off by the extra cost.
• Avoid unnecessary fees. Some payment processors charge extra fees for monthly statements, maintenance, Payment Card Industry (PCI) compliance, and more. Try to avoid such processors or ask them to waive these fees. 
• Minimize chargebacks. Chargebacks occur when a customer disputes a charge due to unauthorized card use, a billing error or a misunderstanding about the quality of the product purchased. In any case, accepted chargebacks require you to refund the original purchase amount and pay a chargeback fee to the payment processor (usually $20 to $100). Frequent chargebacks may also result in higher transaction fees.
• Require a minimum purchase amount. Small purchases tend to incur disproportionally high credit card fees. Offset these by setting a minimum purchase amount for credit cards (under which customers must use cash). However, keep in mind that $10 is the maximum you can require for a minimum credit card purchase.
• Avoid flat-rate pricing. Though flat-rate pricing is more predictable, it tends to be more expensive because it prevents you from taking advantage of lower interchange rates that can come with higher sales volume or certain transaction types.

FAQs On Credit Card Fees

Here are answers to frequently asked questions regarding credit card fees:

Do I have to pay credit card processing fees?

As a merchant, you typically must pay credit card fees to your payment processor. However, you can roll these charges into the prices of your goods and services and reduce them by negotiating and shopping around for the best rate. As a consumer, you typically either won’t see credit card fees explicitly called out, or you won’t be able to negotiate them.

Why are some fees on credit cards higher than others?

Credit card fees can vary based on the pricing structure, credit card issuer, payment processor and other factors. For example, American Express (Amex) is a closed credit network, meaning only American Express and issue Amex credit cards. This gives the company more control over its fees, which tend to be higher than those of other networks.  

Are credit card fees higher in person or online?

Online credit card purchases often carry higher fees than in-person purchases due to the increased security risk. Specifically, it’s easier for criminals to steal credit card information and commit fraud online than it is to steal physical credit cards and use them in person. 

The Bottom Line

While most merchants can’t get around paying credit card fees, they can often lower them by understanding how they work. Whether you accept credit cards in person, online or both, there are ways to minimize the cost.

Curious how credit card fees will fit within your overall budget as a consumer? Download the Rocket Money℠ app. It can help you track your income and expenses and identify opportunities for improvement.