Why do some stores have credit card minimums?

Have you ever pulled out a credit card to pay for a purchase only to find out the store has a credit card minimum you haven’t quite met yet? If so, then you’ve also likely asked yourself why there’s a credit card minimum at all. Although a minimum charge can be annoying or downright inconvenient for the consumer, the merchant has financial reasons for enforcing one.

If a merchant accepts credit card payments, then it’s relying on a card network like Visa, Mastercard, Discover or American Express (or even a combination) to process credit card transactions. And these networks charge interchange fees — or “swipe” fees — every time a customer pays with a card. Because the merchant can’t avoid these fees, it’s likely setting a purchase minimum to offset that cost. –which is likely the driving factor behind the minimum purchase requirement—so it means setting a purchase minimum to help offset the cost.

Here’s an explainer on credit card minimums and how they affect consumers.

Is a minimum purchase requirement legal?

Yes, minimum credit card purchase requirements are legal. However, there are requirements a merchant must follow, and the minimum can’t be a random amount the merchant decides on a whim.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 spells out the minimum purchase requirements that merchants can ask of consumers using a credit card for payment.

Specifically, merchants have the option of setting a $10 minimum purchase requirement with credit cards to help offset the cost of burdensome processing fees. However, $10 is the maximum amount the merchant can require for a minimum purchase. And this minimum applies only to credit card payments, and not debit cards. It’s illegal for a merchant to impose a minimum purchase amount for debit card purchases.

It also states that if the merchant chooses to impose a $10 minimum purchase requirement for credit card purchases, then it must do it for all credit card companies. In other words, a merchant can’t pick a minimum only for American Express customers and not enforce it for Visa and Mastercard purchases.

Why would a merchant require a minimum credit card purchase?

A $10 minimum purchase amount may sound confusing to a consumer — after all, a consumer doesn’t typically pay a fee for the convenience of using a credit card. Merchants, though, pay an interchange fee — also called a “swipe” fee — for every credit card transaction.

Interchange fees per credit card transaction vary widely, but it makes up the majority of the total credit card processing fees paid by a merchant. Credit card processing fees can be 1.5 percent to 3.5 percent per transaction, depending on the purchase amount, which is taken directly out of the merchant’s revenue.

If your credit card purchase is under the $10 threshold, then the interchange fee may not only eat away at the merchant’s profit margin, but in some cases also cost the merchant more than the price of that item to sell it to you.

How interchange fees work

Tapping or swiping your credit card for a purchase is second nature to the everyday consumer, but there’s quite a bit that happens in the background for the credit card transaction to take place.

When you use a credit card to buy something at a terminal or with a merchant, the card requests and receives authorization from the credit card company to extend the amount of that purchase to you. At the same time, the credit card issuer runs checks to verify your purchase isn’t fraudulent activity. After the purchase is verified, the issuer processes the payment. The merchant’s interchange fee covers the costs of processing all of those steps smoothly and without too much disruption at checkout.

The impact of interchange fees

How much of an impact can an interchange fee make on profit? Let’s assume a couple owns a gas station and sells a candy bar for $2. They bought the candy bar wholesale at $1.50, expecting to make a 50-cent profit on your purchase. Now let’s say you use a credit card to buy that candy bar. On that $1.50 purchase, the interchange fee would total a 40-cent minimum for the merchant, resulting in only a 10-cent profit for the store owners. It means the difference between a 25 percent profit on that candy bar and a low 5 percent profit with a credit card.

While interchange fees do eat into a merchant’s profits, store owners must carefully balance the amount of money they’d stand to lose out on if they prohibit customers from paying with a card. With the use of credit cards for transactions continuing to rise in the U.S., it’s understandable they’d want to impose a minimum purchase requirement to cut down on interchange fee costs.

How to avoid minimum purchase requirements

There’s no way for a merchant to avoid paying interchange fees if they accept credit card payments from their customers. It’s a fee they must factor into the bottom line, weighing how to sell an item while minimizing the money lost to interchange fees.

As a consumer, however, you have options for avoiding the minimum purchase requirements, including:

• Add items to your purchase. Purchase as many items as you can in one transaction, so that you can meet the minimum purchase threshold.
• Pay in cash. You can avoid the minimum requirement for a credit card by instead digging into your wallet for cash.
• Shop somewhere else. If meeting a minimum requirement or paying in cash don’t sound appealing, you can take your business elsewhere to a shop that doesn’t impose minimums. (Though don’t let it fully get in the way of supporting your local small businesses!)

The bottom line

A merchant must pay an interchange fee every time it accepts a credit card for a transaction. These fees can add up for a merchant, quickly eating into profit margins and even making smaller transactions unprofitable. Merchants are legally allowed to impose a $10 minimum purchase requirement for credit card purchases to help combat these fees. But that’s the maximum amount, and they must apply it across the board to all credit card transactions.