Will More Merchants Require a $10 Minimum on Credit Card Purchases?

Another outcome of the Dodd-Frank Wall Street Reform and Consumer Protection Act,  effective July 2011, was permitting merchants to set a minimum credit card purchase of up to $10.   It required merchants to treat all credit cards the same. In addition, the Federal Reserve was allowed to review and increase the minimum amount.

Prior to the law, Visa, MasterCard and Discover Card didn’t permit merchants to set transaction minimums. American Express allowed merchants to set minimums, as long as it applied to all credit cards.

Cost to merchants

The key reasons the merchants pushed this law was based upon the fees they pay for credit card transactions.  The fee runs from 1 to 3.5 percent of the transaction plus a per-transaction cost of 5 to 10 cents.

For example, let’s assume that the fee is 3.5 percent and the transaction cost is 10 cents for a $10 purchase. The fee is 35 cents and transaction cost is 10 cents, totaling 45 cents or 4.5 percent of the purchase amount.  Let’s take a $5 charge and use the same numbers.  The fee would be 18 cents and transaction cost of 10 cents, totaling 28 cents or 5.6 percent of the purchase amount.  The merchants have to subtract this from their profit margins, or do they?

Who pays for this?  Usually the consumer does and the price of the merchandise is increased to cover these costs.  If you pay with cash, you also help fund the fees.

Minimum is optional

Merchants don’t have to set a minimum; but they have the option.  It mostly depends upon their margins and average transaction per customer.  If most of their transactions are below $10 and most use a credit card, setting a minimum could hurt their business. Some are being creative and offering rewards to those that pay by cash.

Most Americans are less likely to carry cash and prefer to use credit and debit cards for convenience.  There isn’t a law that permits a minimum purchase for debit cards, but there is a law that sets the transaction fee at 21 cents for retailers that swipe debit cards issued by large banks.  There was no law passed that set the transaction fee for credit card transactions.

How will you react, if you find out that a merchant has set a minimum purchase amount of $10 for credit card transactions?  Will you buy more to get to $10, use cash, use your debit card, or walk away?

Credit Expert Witness, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Credit Cards, Debt, Debt Management, Financial, Money & Identity

This post was written by John Ulzheimer