Why are there new charges possible on credit card transactions?
There was a recent court settlement in Canada from a a long-running class-action legal battle. The suite was launched by retail merchants against certain banks and Visa and MasterCard.
The action alleged that the “Defendants” (Visa, MasterCard and named banks) had conspired to set higher interchange fees. Also, they imposed rules restricting merchants’ ability to surcharge or refuse to accept higher cost Visa or MasterCard. The Defendants had a policy where they did would allow merchants to charge transaction fees directly to the consumer. These fees range between 1% to 5% per transaction. The fees vary depending on what is purchased and the type of the card used.
The major credit card companies say the average fee they charge is 1.4 %, but it can go up to a cap of 2.4% for small merchants and for expensive cards such as American Express their reported fees go as high as 5%. The fee that may now be charged directly to the consumer by the merchant is currently set at 2.4% and they must make it clear to customers at the time of payment that the surcharge will be applied to the purchase.
Historically merchant fees were paid solely by merchants and are a large part of the income earned by the Defendants. Credit card companies were fearful that if these fees were passed along it would change consumer behaviour. The fear was that consumers would switch to other forms of payments resulting in lower profits for credit card companies and banks. Probably a reasonable concern for the Defendants, but the court found that limiting the behaviour of individual merchants was contrary to the federal Competition Act.
Types of fees
Annual Fees
Some cards charge an annual fee each year. Some may also charge additional fees if you request another card for that account. Cards with annual fees usually have additional benefits and rewards, or a lower interest rate. Make sure to consider whether these benefits will save you money, otherwise a card with no annual fee may be the better option.
Cash Advance Fees
This fee is charged when you:
- Use your credit card to withdraw cash from an ATM
- Use your credit card to withdraw cash at a bank
- Use convenience cheques, also called credit card cheques
- Charge cash-like transactions such as wire transfers, money orders, travellers cheques and gaming transactions (using your credit card to place bets and buy casino chips)
A cash advance fee could be a fixed amount, or a percentage of the transaction. Some credit card issuers may also set a minimum and maximum cash advance fee. You will also be immediately charged interest, and continue to be charged interest daily until the entire advance is paid. Try to use your debit card instead. If you use a cash advance, pay as much as you can as early as possible. The interest charged costs more each day you wait. You can make a payment on your credit card account at any time, and don’t have to wait for your statement.
Foreign Currency Conversion Fees
When using your credit card outside of Canada, your card issuer will charge you the exchange rate, plus a conversion mark-up as indicated on your credit card agreement. If you try to withdraw cash from a foreign ATM with a credit card, it is treated like a cash advance, with a conversion mark-up fee.
Penalty Costs Over-the-limit Penalty
A credit limit is the maximum amount you are allowed to spend using your credit card. The penalties you pay for going over the limit varies between issuers. They will not inform you when you are about to go over your credit limit, so it is your responsibility to keep an eye on your balance.
Bounced Payments
This fee may be charged when:
- A payment by cheque is returned due to nonsufficient funds
- You use a convenience cheque to get a cash advance on your credit card, but the issuer returns the cheque because you are over your limit
- A regular payment by pre-authorized debit is rejected due to nonsufficient funds
Inactive Account Fee
Generally, after a year, some credit card issuers may charge you a fee for maintaining an inactive account, and may even close your account. If you no longer need your credit card, make sure to contact your card issuer to cancel it, and keep a record of the cancellation.
When do the new direct charges come into effect?
Effective October 6, 2022 businesses are allowed to charge an additional fee on your credit card transactions, however, they have to register their intention with their credit card processor 30 days before they can start.
Some large retailers have already indicated that they will not be passing along the fee, but others like TELUS, will introduce 1.5% fee starting October 17, 2022.
How do you know which businesses are charging the new fees?
To avoid credit card fees it will help to aware of your surrounding when making purchases in person. Businesses will have to post a notification at the entrance to their business, on every receipt, at every point of sale, both online or other payment method; including the percentage to be charged.
What can I do to avoid the extra charges and credit card fees?
For small purchases and local retailers, you may not worry too much about avoiding the credit card fee. Paying a small fee directly to them, may actually help the small retailer survive. Alternatively, you may use cash, debit, or shop at places that won’t actually charge this fee per transaction. If it is a recurring charge, you can set up preauthorized automated debit from your bank account rather than through your credit card for ongoing transactions and bills.
Or, simply opt to switch to the old fashioned “the cheque is in the mail” method for large retailers TELUS. Hopefully they will decide that processing thousands of paper cheques is way more costlier for them that eating the 1.5% fee they plan on passing along to the consumer.
Consumer Protection – should you be using your credit card?
For larger purchases, especially deposits on future goods or services, using your credit card does offer some level of consumer protection. When you are placing a deposit on a future purchase (like a wedding dress or a new vehicle) then using a credit card can help to protect your deposit. So, if the company who accepted the deposit does not ultimately provide your good or service, you can dispute the charge. If your dispute is successful, your deposit will be refunded directly from the credit card company. Alternatively, if you placed a cash deposit or entered into a cash purchase, your only option if a future dispute arose would to use the court system (i.e. sue them in court).
Additionally, credit card purchases often come with purchase protection, warranties or insurance. (i.e. think of flight cancellation insurance, rental car insurance etc). And purchasing on credit does offer the ability to pay at a future date – either paid or full or with ongoing interest. And then there is the allure of reward points which may be enough incentive for most consumers to continue to use their credit cards, even if there is an additional fee. Either way, the consumer will now be carrying an additional burden.
Avoid Credit Card Fees in Each Province
Interestingly, avoiding the credit card fees will be easier in Quebec. Passing along the credit card fees will not be allowed in Quebec as that province’s Consumer Protection Act does not allow passing along these fees to consumers.
British Columbia and the other provinces all have their own similar Consumer Protection Acts. However, they are silent on protecting consumers from credit card fees. Changing provincial legislation may be something that we as consumers should be encouraging the provincial governments to review. Changes to BC Consumer Protection Act will help all avoid credit card fees.
