How To Calculate Effective Rate For Credit Card Processing

For smaller businesses, the cost of payment processing can be a financial burden. However, the FTC cautions against extremely low credit card processing rates that can be a sign of a scam. To help you check whether your business is paying too much for your merchant account, you can calculate the effective rate.

The effective rate is a combination of the interchange rate, credit card processor’s markup fee, and other fees. It can be calculated by the total sum of your processing fees divided by your total sales volume. 

What Is an Effective Rate?

This is when you add up the amount of all the credit card processing fees you pay divided by the total sales volume found on your credit card processing statement. 

This usually involves three key factors:

  • Interchange rate: A fixed rate per transaction that banks charge for handling card transactions, which can vary depending on merchant type
  • Processor fees: An added fee charged by your credit card processor for each transaction
  • Monthly fees: Other fees and deductions that can be charged by your merchant 

To get the effective rate expressed as a percentage, multiply the end figure by 100. Ideally, you should see a rate of somewhere between 2.5 and 3.5%. 

Factors that Impact Your Effective Rate 

If your effective rate is much higher or lower than the average amount, there may be several reasons why: 

  • Your payment processor is charging you too much
  • You are in a high-risk industry, leading to higher interchange fees
  • You have plenty of international transactions or online transactions that carry a higher 

If your effective rate is cutting into the bottom line of your business, it may be time to shop around for a more competitive provider. To help you find the best credit card processor for small businesses, reach out to us at Processing Card today.

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