Q: Help! I am a consultant working out of my home, and I need to become a credit-card merchant so I can accept MasterCard and American Express. However, I have heard one horror story after another about what other businesses have faced in the areas of additional fees, high percentages per transaction, etc. What should I watch out for? Should I actually go shopping for the best rate? If so, how do I know when I get it?
--J.S., Saukville, WI

A: The brutal truth is that the credit-card industry has you over a barrel. As a home-based business with no track record as a card-carrying merchant, you are going to pay among the highest rates in the field. Benchmark rates paid by U.S. merchants average 2% per transaction for Visa and MasterCard and 2.7% for American Express. But only the largest retailers with state-of-the-art processing systems, which minimize the credit risks to banks, get those rates.

In your situation, says Robert B. McKinley, president of CardWeb Inc., a Gettysburg (Pa.) payment-card research firm, you can expect to pay as much as 4% to 6% of each transaction. That pie gets sliced at least four ways -- usually equal parts to the bank that issues the card to the consumer and to the merchant bank (which has the credit-card account with a business owner), part to the clearing system (Visa and others), and part to the independent service organization (ISO), or the middleman, who signs up tiny merchants like you on behalf of big acquirers.

Fees can vary widely for each merchant as well as for the merchant banks. Among the factors used to determine your rate are your credit history, type of product or service, anticipated credit volume, and how long you've been in business. How you accept your customers' card information can also affect the rate. Taking card numbers over the phone, for example, is riskier and will thus cost you more, McKinley warns.

Given all the variables, you should shop around. If you have a good relationship with your local bank, your best bet is to try to get "merchant status" directly from that institution. Although you will still pay the upper end of its rate range, McKinley says that you will do better than going through an ISO. Otherwise, try using the Internet to find the best rates. Cardservice International sets up small merchants online. Credit Card Network offers both online merchant accounts as well as manual processing for phone, fax, and mail orders. Its site also lists a number of ISOs who specialize in small and home-based businesses.

When shopping, consider all the extra fees besides your per-transaction costs. Most ISOs charge an application fee, a monthly service fee, and a few cents (up to 10 cents) per transaction on top. Then there's a rental fee for a credit-verification terminal and charge-back fees of as much as $15 per incident if a customer should dispute a charge from you. (That can be especially onerous on a per-unit price basis if you sell high volumes of low-priced products to consumers, so watch out!) Add it all up, and the difference of a few basis points on the per-transaction charge may be peanuts compared with the other fees. But you have to start somewhere. The good news is that once you establish merchant status and a track record of low-risk transactions, you will be in a stronger bargaining position to either renegotiate your fees or find another merchant bank.

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