3 min read

what is a transaction fee and how does it work

Holding a credit card feels like holding a key to endless possibilities, yet every swipe or tap comes with its own little toll: Transaction fees.

These small charges might not catch your eye at first glance, but they accumulate, influencing the overall cost of your adventures in spending and financial maneuvering.

Peeling back the layers on how transaction costs work equips credit card users with the knowledge to make choices that lead to smarter savings.

Understanding these costs goes beyond simply steering clear of statement surprises. It involves making choices that elevate your financial well-being through insight and foresight.

The Basics of Transaction Fees

At the heart of every credit card swipe, tap, or online click is a transaction fee, a small charge applied to each purchase. This credit card transaction fee is the price of convenience, enabling instant payments, secure processing, and the myriad benefits that come with credit card usage.

Typically calculated per transaction, these fees are a fundamental aspect of the payment processing landscape. They serve as compensation for the network of the payment service provider that works behind the scenes to ensure your transaction is smooth, secure, and successful.

These fees also reflect the technical and operational costs incurred by providers. From maintaining robust cybersecurity measures to ensuring real-time processing across global networks, there's a vast infrastructure that demands constant upkeep and innovation.

This infrastructure makes seamless transactions possible, and the fees help sustain this essential financial ecosystem.

Types of Transaction Fees

Credit card usage brings with it a spectrum of transaction fees, each tailored to different aspects of your spending. These fees range from the cost of processing a payment to handling international transactions, influencing how and where you choose to use your credit card.

Per Transaction Fee: Network Fee and EFT Terminal Fee

At the crux of credit card usage is the per-transaction fees, notably the network fee and the Electronic Funds Transfer (EFT) payment services or terminal fee. The network fee is a cost levied by the card's network (like Visa or Mastercard) for each transaction.

Alongside, there's the EFT payment service or terminal fee, typically incurred when a transaction is processed through a payment terminal or electronic system. These fees are often borne by the merchant, which is why you might encounter minimum spending limits at some stores.

Merchants set these limits to offset the costs of processing small credit or debit card transactions, ensuring that their profit margins remain intact.

Foreign Transaction Fees

When you use your credit card abroad or for purchases in a foreign currency, you'll encounter foreign transaction fees.

These fees are charged as a percentage of the transaction amount and cover the costs of converting your purchase from one currency to another. They're an essential consideration for frequent travellers or those who shop from international websites.

International Transaction Fees

Separate from foreign transaction fees, international transaction fees are applied to purchases made outside of your home country, even if the transaction is in your home currency.

This fee, which is also a percentage of your transaction amount, covers the additional risks and costs associated with cross-border transactions.

Understanding the distinction between these and foreign transaction fees is crucial for those regularly engaging in international spending.

Fees for Online Payments and Digital Wallet Use

The rise of online shopping and digital wallets has introduced another set of fees. Online payment fees are often included in the cost of your online transactions, and digital wallet fees may apply when you use services like Apple Pay, Google Wallet, or virtual credit cards.

These fees cover the added layers of technology and security needed to process these modern forms of payment, ensuring that your online financial transactions are as secure and efficient as those made in physical stores.

How Are Transaction Fees Paid?

Transaction fees might seem like a small backstage detail in the grand narrative of your spending, but they play a pivotal role in the financial transactions you perform every day. Understanding how these fees are paid can shed light on the inner workings of your financial dealings.

Fees Charged to the Credit/Debit Card

Imagine you're buying a coffee for $5, and there's a transaction fee of 5%. The fee (5% of $5 = $0.25) is added to your total, making your payment $5.25. This is a direct and visible addition to your transaction amount.

Processing and Convenience Fees

During international transactions or special services, you might see a separate charge labelled as a processing or convenience fee.

For example, if you're charged a $2 fee on a $50 purchase, your total charged amount becomes $52. For transparency, this fee is usually outlined in the payment summary.

Fee Deducted from the Total Transaction

For merchants, transaction costs can be a bit different. If a product is sold for $20 with a 3% transaction fee, the merchant receives $20 - (3% of $20 = $0.60), totalling $19.40.

This means the fee is deducted from the sale price, affecting the merchant's net revenue.

Post-Payment Billing

Sometimes, transaction fees manifest as post-payment billing, where you're charged a flat fee or a fixed percentage of the transaction cost later.

This could be deducted from your account balance or appear as an invoiced fee to be paid later. For instance, a monthly fee for maintaining a merchant account could be part of these costs.

Regarding post-paid transaction fees, banks and finance providers tend to have different fee structures, so it’s best to pay close attention to your policy.

Flat Fee

In some scenarios, transaction fees come as a fixed amount, known as a flat fee. This is a straightforward, predictable charge that doesn't vary with the transaction size.

For example, you might encounter a situation where every transaction incurs a $1 fee, regardless of whether you're spending $5 or $50.

Account Overdraft

Overdraft fees are a specific type of fee charged by your issuing bank when you spend more than what's available in your account. Ideally, your credit card company should offer some kind of overdraft protection coverage to prevent being charged this type of fee.

Consider this: if your account balance is $100, and you purchase $105, the bank may cover the extra $5 but also charge an overdraft fee, which could be a fixed amount or a percentage of the overdrawn sum.

In these scenarios, understanding the nuances of payment processing services and being aware of pending transactions on credit cards or reasons why a credit card is declined can be crucial.

It's not just about the customer pays principle but also comprehending the monthly fees, transaction costs, and how they're calculated, whether it's a fixed percentage or a variable cost based on the total transaction.

Disputing Transaction Fees and Credit Impact

When it comes to transaction fees, a common concern arises: if you're wondering whether disputing a transaction fee affects your credit rating, it's important to understand the implications.

Disputing a fee, especially if it's erroneous or fraudulent, is your right as a consumer. While the dispute process itself doesn't directly impact your credit score, unresolved disputes or late payments resulting from a dispute can have an effect.

If you're concerned about how such actions might influence your financial standing, remember that you can always check your credit score for free to monitor any changes and maintain your financial health.

Conclusion: Navigating Transaction Fees with Knowledge

Being informed about transaction fees is key to being financially savvy when using credit cards. Whether it’s an online transaction, facing higher fees for international purchases, or processing transactions at local stores, every card payment has its nuances.

By using a credit card provider like Koho, you're better equipped to manage your expenses and even build your credit. Additionally, considering options like a high-interest savings account can further enhance your financial strategy.

Remember, knowledge is power, especially when it comes to navigating the intricate world of credit card fees.

Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up to date account information!

Nick Saraev

Nick is a freelance writer and entrepreneur with a particular interest in business finance. He's been featured in publications like Popular Mechanics and Apple News