Ask Stacy: What’s With Credit Card Minimums?

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With all the changes on credit cards in recent years, it’s easy to get confused about exactly what the rules are. Here’s a recent question:

A few times when trying to purchase something at a retail store the merchant won’t take my card unless I spend a minimum amount of money. It’s my understanding that this is against their agreement with the credit card company providing the service. Could you elaborate on this? If I’m right I would like to know how to report it to the credit card company.
Thank you.
Mary

Here’s your answer, Mary!

Had you asked this question a year ago, prior to passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, you would have been correct to question the validity of minimums for credit card purchases. Although it’s always been common to see signs at cash registers requiring you to spend a certain amount to use plastic, until the passage of Dodd-Frank, they were a violation of the rules established by credit card processors like Visa and MasterCard. Now, however, they’re perfectly legit.

From my July 2010 story 4 Ways You Lose From Financial Reform

Cash – don’t leave home without it.

In the past, you may have seen signs in smaller stores saying something like “Minimum credit card transaction $10.” You shouldn’t have, because that practice violated Visa and MasterCard rules. Merchants were required to accept plastic for any amount.

But now, courtesy of the new law, stores are allowed to set both minimums and maximums for credit card transactions.

Expect to see more signs establishing a minimum purchase for plastic. In addition, if you’re the type that pays big bills like income taxes or college tuition with a credit card – perhaps to get mileage awards or cash back – you may encounter maximums as well.

The reason merchants lobbied for this change was that minimum fees charged to merchants by credit card processors made small transactions prohibitively expensive. For example, while MasterCard or Visa may charge a restaurant 2 percent to process a credit card transaction, they might have a minimum fee of $0.25. So if a customer charges a $1.00 glass of iced tea, the bank is making $0.25, or 25 percent, on that transaction. That’s a fat cut – and enough to make the tea unprofitable.

Here are some additional changes from Dodd-Frank we warned about in that same article that are also now becoming fact.

Fewer debit card rewards programs

The fee referred to above is called an interchange fee, also known as a “swipe fee. ” The fee for debit cards currently averages about $0.42. Under the new law, however, the Federal Reserve was allowed to cut them in half. Starting Oct. 1, 2011, the maximum a bank can charge a merchant to process a debit card transaction is $0.21 to $0.24. Credit card processing fees weren’t capped – just debit card fees.

This is obviously good news for merchants – they’re paying less to accept debit cards. But their gain is the bank’s loss. If banks make half the money they used to on debit card transactions, they’re less likely to provide rewards on their cards.

Mortgage money – harder to come by

Dodd-Frank did a lot to help avoid future mortgage problems by eliminating things like prepayment penalties, no-documentation loans, tricky interest rate calculations, negative amortization loans, and stealth fees. All good for consumers. But that’s a double-edged sword. To make up for lost revenue in subprime loans, all loans have become harder to get – and sometimes more expensive. To get the best terms, you now often have to cough up a bigger down payment and a higher credit score.

Higher fees on checking and other bank services

At the heart of the financial reform bill was a massive transfer of wealth from Wall Street to Main Street. Restricting the ability of banks to trade unregulated derivatives contracts, lowering the fees they earn on debit card transactions, increasing the regulatory red tape they face – all things that will have a negative effect on profitability.

What will banks do when they’re making less? The same thing you’d do in similar circumstances: try to make up for it elsewhere.

One way banks can create new revenue to replace what they’re losing is to borrow a strategy from the airlines: increase existing fees and invent new ones. Things like free checking are getting harder to find. ATM fees are increasing. Having paper statements delivered could cost more. In short, the nickel-and-dime fees we’re used to from banks are starting to become dime-and-quarter fees.

Bottom line? Dodd-Frank did a lot to level the playing field on banking transactions and protect consumers. But there’s no free lunch. Those protections come at a price.

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