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Credit Card Surcharges vs. Cash Discounts

Written by Nickel - 15 Comments

Credit Card Surcharges vs. Cash Discounts

Have you ever noticed that certain businesses offer a discount for paying with cash vs. credit? This practice is particularly common at gas stations, though you’ll sometimes see it at other businesses, as well. And yet, as we’ve discussed, it’s against the policies of the major card networks (Visa, MasterCard, etc.) — and, in some cases, against state laws — to charge a premium for using a credit card.

So what’s the deal? Are these businesses breaking the rules? As it turns out, dual pricing is allowable, but only if the vendor advertises the credit card price and then offers a cash discount from there. In contrast, they’re not allowed to advertise something at a certain price and then tack on an upcharge for using a credit card. Seems like a silly distinction to me, but it is what it is.

Given this loophole, a number of businesses have taken to incentivizing cash by passing a portion of their savings on to the customer. From a consumer standpoint, you have a decision to make. Is it worth giving up the convenience of your credit (or debit) card, as well as the cash back rewards, in return for a cash discount? In some cases, yes. In other case, no. It all depends on how big the discount is — and how much extra cash you’d have to carry around to cover the expenditure.

I’m mainly bringing this up today because I recently received an e-mail from a reader named Joe who ran into something similar at the doctor’s office. Apparently he’s been dealing with an eye surgeon who is charging $5400 for a certain procedure, but wants more if you pay with a credit card. Joe was wondering if this is allowable.

In short, it all comes down to how the dual pricing is presented. If the doctor is advertising the procedure at $5400 and then upcharging if you want to use a credit card, he’s running afoul of the credit card rules, and possibly state law. If, on the other hand, he is charging (say) $6000, with a 10% cash discount, that’s perfectly allowable. Again, it’s a silly distinction, but it is what it is.

We’ve actually run into this ourselves at the orthodontist, where they offer both a cash discount and a discount for paying for the full course of treatment in advance vs. doing an installment plan. Since we’ve been in the fortunate position of having the cash on hand, we jumped at the chance and saved a good bit of money.

What do you think? Should dual pricing be allowed? Do you choose to pay with paper over plastic when there’s a discount involved?

Published on November 18th, 2011
Modified on November 21st, 2011 - 15 Comments
Filed under: Credit Cards

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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15 Responses to “Credit Card Surcharges vs. Cash Discounts”

  1. 1
    Bill Says:

    This information is outdated. The situation as you describe used to exist. However the Frank-Dodd Act has made it illegal to prohibit differential pricing based on payment method.

    That double negative means it’s now perfectly acceptable for any merchant to charge different prices based on payment method be it credit card, debit card, cash, check etc. I believe the only rule is that you can’t charge different prices for a different type of credit, ie your credit price has to be good for any credit card you accept.

  2. 2
    Bill Says:

    Actually I guess that is exactly what you were saying, I read through it too fast. I wouldn’t call it a loophole, it’s completely intentional. You can charge multiple different prices as long as you call the highest one “the real price”. You’re even required to clearly display all the prices where all customers can see them.

  3. 3
    Des Says:

    Not only should it be allowed, it should be the norm. It costs the merchant to accept a credit card, and without dual pricing that cost is passed on to all customers. Using a card offers certain protections, rewards, and convenience. The person who receives those benefits should be the one to pay for them. Otherwise, cash-payers are subsidizing credit card users. I would rather have the choice between the lower price and the convenience, and single pricing takes that choice away by eliminating the lower-priced option. Visa and Mastercard should not be allowed to dictate what the merchants charge for their wares.

  4. 4
    Arvin Says:

    @Des: Except the surcharges are usually flat rates at stores, despite the fees being a percent of the total (or rather, a flat number like 10 cents, plus between 1-3 percent). If you insist on people having the choice, then at the very least stores shouldn’t charge flat fees and really they should pass the exact transaction cost over to the consumer. I should not have to pay them more than the transaction fee so I can use my credit card.

  5. 5
    Arvin Says:

    Oh, and also BTW the idea of merchants eating the cost of these fees is because, especially with more expensive items, forcing people to pay by cash severely limits how much a person can buy on the spot; If you commute long distances every day you might be filling up every two days; and unless you want to go to the bank each time, you’d better be carrying a lot of cash on you.

    For better or worse, credit cards allow merchants to make money off of people even if they don’t have cash on them at that given time. The increase in business they receive from people who need to pay by card should easily offset the transaction fees they get charged.

  6. 6
    Mike B. Says:

    The main “cash” discounts I’ve encountered are from doctors, who actually mean pay up front, rather than making the bill insurance. We also had a contractor who offered not to charge us sales tax if we gave him cash rather than writing a check…. Stayed far away from that one.

  7. 7
    TFB Says:

    I agree with Des. Yes it should be allowed and it should actually be explicitly stated as a surcharge, not a cash discount, because that’s exactly what is: an additional cost to do business.

    The more intriguing part won’t be cash versus card. It would be debit card versus credit card. If paying by debit card gives both the consumers and the merchants the benefits they are after — convenience and accuracy — it would be good for both. It doesn’t make sense for the merchant to pay a high fee on credit cards, let the credit card company keep a good portion, and then pay the remainder to the consumer as rewards. Under the current state laws, offer a discount on debit cards issued by banks subject to the fee cap, then everybody will be happy.

  8. 8
    bruce Says:

    The only places I’ve seen a difference in price is at the gas station and home maintenance workers. I only buy gas with a credit card, so I only buy at stations that charge the same for both and that their price is as low as the cash price at other stations. But my oil company does charge a handling fee for Visa, but not Mastercard. I can’t call this a cash vs credit card price difference since Mastercard is same as cash.
    I can certainly understand wanting to charge more for credit cards, since they cost the merchant accepting them, but it’s part of the price of doing business. It should be built into the price. We expect buying from merchants that have lower overhead to be cheaper. If a store doesn’t accept credit cards, we expect lower prices. But I’d hate to see stores have a dual pricing system.

  9. 9
    BG Says:

    I have never once seen a business offer a cash discount, not in central Texas where I live. Must differ by state…

  10. 10
    Jonathan Says:

    @BG, same here. Never seen or heard of this practice.

  11. 11
    Jenny Says:

    I’ve never noticed a cash discount offered, but I understand this was pretty common practice when credit cards first came to the scene. I occasionally see a minimum credit card purchase (usually between $2 & $5). This is usually not an issue, however. I do make a point of paying with cash at small businesses if I can, since I know that those credit card transaction fees can really add up.

  12. 12
    Financial Money Tips Says:

    I really have no problem with dual prices. It doesn’t really effect me that much as I usually buy most of my necessities with cash. I like to use the cash back rewards cards with bigger items such as a big screen TV. Something that will give me a bigger discount!

  13. 13
    Joe Says:

    I buy nearly everything with my credit cards, as it is convenient plus I get the cash rewards. That said…I completely understand why a merchant would want to charge a separate price for using the card as it can greatly cut into their margins. Depending on the business, the margin surrender can be huge (like gas stations where margins are already thin).

    I also sometimes feel guilty using my credit cards when purchasing from local small businesses. I paid with cash the other day for a new transmission since the mechanic was a family friend and I felt bad stealing a few points from him.

  14. 14
    John Says:

    I disagree with “Financial Money Tips” using cash for necessities. My financial money tip is to use your rewards credit card for everything (assuming you pay it off every month, obviously). In the past year, we’ve had ~500 transactions under $50 averaged at about $20 per transaction. At a minimum cash back reward of 1% (we get better because I play the credit card reward game to get 2% on gas, 3% on groceries and 5% revolving categories), I’d be leaving at least $100 on the table every year if I used cash. Why would I do that?

    All that said, I am all for a cash discount. If the cash discount is better than my credit card reward, I’ll gladly pay in cash. If the cash discount is in the sweet spot of more than my rewards card and less than their processing fees, everyone wins. The business owner gets more and I get more… sounds good to me.

  15. 15
    b Says:

    Obviously, none of the comments come from small business owners. The credit card merchant companies charge the small business the full amount or more than the rewards given back to the consumer. This is HUGE for the small business owner. The business owner must either charge more for their product, which hurts the consumer in the long run or offer a reward for cash.

    For the person who thinks each person should be given back exactly what the fee is, and not a flat fee, this would create a major bookkeeping nightmare for the business owner.

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