How To Calculate Your Effective Rate For Credit Card Processing (2024)

Key TakeawayThe effective rate is the total processing fees divided by the total sales volume.Look for an effective rate between 2-4%. A high effective rate may be unavoidable if you are a high-risk business.

To keep your business’s payment processing expenses pruned to a minimum, one of the first things we do is calculate your effective rate. Once we find the effective rate, we can determine if you are paying too much to accept credit cards.

If you do find that your effective rate is too high, you’ll want to consider our list of the best credit card processors. These companies are free of the bigger red flags you’ll want to look out for, and they all have excellent pricing transparency.

But first, let’s define “effective rate” and show you how to calculate your effective rate for payment processing.

What Is Effective Rate?

Effective rate is the total processing fees divided by total sales volume on your business’s credit card processing statement. It’s usually expressed as a percentage, and it’s one of the quickest ways to uncover if you’re paying too much for your merchant account.

Another way of thinking of your effective rate is a combination of interchange fees, plus your processor’s markup. Interchange fees are the wholesale credit card processing price of your transactions, which cannot be avoided. However, processor markups can vary considerably from one company to the next.

How To Find The Effective Rate For Your Processor

To find the effective rate for your credit card processing, you first need to round up all of the fees on your statement and add them up. We’ll use the following statement as an example:

In the example above, we’ve highlighted the total sales volume in green, and the total fees in red.

So, what is the effective rate for this statement? If you figured out 5.99 or 6% (rounded) you would be right. To find the effective rate, you divide the total sales by the total fees:

$5907.03 / $98511.45 = .0599 or 5.99%.

To get the most accurate effective rate, it is helpful to have at least three consecutive months of statementssince certain fees, such as billback, won’t appear in every statement.

Let’s say your average effective rate over three months is 6%. But what does this 6% mean in the context of payment processing?

What Is A Good Effective Rate For Credit Card Processing?

Generally speaking, a good effective rate for credit card processing is around 2-4% — I share that figure to give you a starting range for the “red-flag area.”

With that being said, there also may be some legitimate reasons your rate inches beyond that.

Reasons For A High Effective Rate

In some cases, a high effective rate cannot be avoided–for example, if your business is classified as high-risk–while in other cases, your processor just might be charging you a lot of junk fees.

It’s also worth pointing out that the only way you can clearly see the various fees that your merchant services provider is charging you (the markup separated from the interchange fees) is with a transparent pricing plan like interchange-plus.

Here are some common reasons you might have a high effective rate for credit card processing.

How To Find The Best Merchant Services Rates

Now that you have a better idea of what might contribute to your effective rate, the value comes in using this data to find the best rates on credit card processing for your small business.

When it comes to looking for the best merchant services providers that offer the most affordable pricing, you’ll want to find companies that meet the following criteria:

• No early termination fees
• Month-to-month agreements rather than long contracts
• No or small PCI compliance security fees
• Clearly published rates
• No junk fees or bait-and-switch tactics (We look at customer reviews to uncover these.)

Suppose you really like a feature set, but you aren’t sold on all the pricing details or other particulars. In that case, we encourage you to advocate for yourself before signing a merchant agreement and learn how to negotiate a credit card processing deal.

The Bottom Line On Effective Rate: Do The Math

By now you’re probably feeling more empowered to take the reigns and make better choices for your small business.

To recap, if you’re fuzzy on what you’re paying in payment processing fees, the first step is to get yourself at least three statements, add up your total fees and divide that figure by your total sales.

Should you find that your effective rate is over 4%, you might want to find a new processor or negotiate a lower rate.

If you want to learn more about all the miscellaneous merchant services fees that make up your effective rate, read our guide to analyzing your processing statement in full.

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