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Credit Card Processing Effective Rate

How to Calculate Your Effective Rate for Payment Processing

An effective rate is a simple calculation you can use to monitor your business’s payment processing costs from month to month. It’s also an excellent way to compare payment processors—whether you currently accept credit card payments at your business or not.

Here we’ll present the calculation and show you how to find the information you’ll need on your merchant statements. We’ll also explain why it’s important to calculate your credit card processing effective rate each month.

Credit Card Effective Rate:
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Payment Processing 101

Knowing how to calculate your credit card processing effective rate can help you manage your payment processing costs more efficiently—a necessity for businesses of all sizes.

Want to know more about payment processing as a business owner? Click the button below to access our paymentprocessing guide.

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What is a Credit Card Processing Effective Rate?

Your credit card processing effective rate is the sum of all the credit card processing fees you paid divided by your total credit card sales in a given month. The resulting percentage is your effective rate for that month.

(Total Processing Fees ÷ Total Sales) × 100 = Effective Rate(%)

A business that pays $300 in total credit card processing fees on $10,000 of credit card sales has an effective rate of 3% or ($300 ÷ $10,000) × 100 = 3%. It’s really that simple.

Why Does Calculating My Effective Rate Matter?

Calculating your effective rate matters because it gives you a bird’s-eye view of your monthly processing costs. It tells you what your real costs are overall, and it allows you to quickly compare those costs month to month without first digging into the complex fees listed out on your merchant statement.

For instance, if your effective rate stays roughly the same each month despite rising or falling sales, you know you’re processing similar types of transactions and that your processor likely isn’t applying new surcharges or other junk fees. If your effective rate suddenly changes drastically, you know it’s time to investigate and take a closer look at your merchant statements.

Indeed, that’s the entire value of calculating your effective rate each month. The effective rate doesn’t tell you why your overall costs have changed, but it tells you—simply and immediately—that your overall processing costs have changed. The next step is determining why.

What is a Good Effective Rate for Credit Card Processing?

A good effective rate for most businesses is somewhere between 2.5% and 3.5%—but as high as 4% could still be reasonable for certain types of businesses. What’s acceptable really depends on how you want to do business and what services and perks you’re willing to pay for.

For instance, online sales will drive your costs higher because online credit card processing typically requires a payment gateway and generates higher transaction fees. Similarly, low-volume businesses with very low average tickets can typically expect higher effective rates because per-item transaction fees will make up a larger share of their overall costs. Optional perks, such as same-day funding, will also generate additional fees and drive up your effective rate.

Still, in our view lower is usually better, and even online merchants can often get lower effective rates if they have the right negotiating agent on their side. Check out our payment processing service to discover how we can get low-cost payment processing options for our clients.

How to Calculate Your Effective Rate

To calculate your effective rate, follow these simple steps:

Locate Your Total Sales & Total Fees on Your Merchant Statement

Most processors will include your total processing fees in a summary section at the beginning or end of your monthly statement. Sometimes your total sales will be included in this summary, too. If not, scan your statement and look for a section that details your card transactions for the month. This transaction detail will usually include your total sales.

If you can’t locate your total sales on your merchant statement, contact your agent or account manager for help.

Apply the Effective Rate Calculation

Once you know your total sales and total processing fees for the month, apply the effective rate calculation to those totals:

(Total Processing Fees / Total Sales) x 100 = Effective Rate(%).

Continue Calculating Your Effective Rate Each Month

If you’ve just started accepting credit card payments, simply start with your first month and calculate your effective rate each month after that. If you’ve already been taking payments for a while, it would be wise to revisit your earlier merchant statements and calculate your effective rates for as many previous months as you can.

Keep in mind that the value of calculating your effective rate increases the longer you do it. Your effective rate for your first month of processing might be misleading because your fees could include start-up costs that won’t recur. The real picture of what your effective rate should be will come into focus over time.

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