When you make purchases using your credit or debit card abroad or online with a foreign merchant, your card issuer, typically a bank, may apply a foreign transaction fee ranging from 2% to 3% of the purchase amount. Additionally, major credit card payment processors like Visa or Mastercard might add an extra 1% as a currency conversion fee. Let’s dive into how these fees function and explore strategies to reduce or avoid them.
What Is a Foreign Transaction Fee?
Most credit and debit card issuers, as well as ATM networks, impose a fee on transactions made overseas or with foreign online vendors. This fee typically falls between 2% and 3% of the purchase or withdrawal amount.
For instance, imagine you spend $1,000 in a Parisian department store and incur a 3% foreign transaction fee. You’ll see a $30 surcharge on your statement, courtesy of the card issuer.
Alternatively, if you withdraw $1,000 in euros from an ATM with a 3% fee, you’ll end up paying $1,030. Keep in mind that the foreign transaction fee is sometimes referred to as a foreign exchange fee, with the former now separate from currency conversion fees.
What Is a Currency Conversion Fee?
A currency conversion fee entails an extra cost for converting a transaction from one currency to another, such as switching the currency of the country you’re in to U.S. dollars. This fee can originate from card payment processors, ATM networks, or dynamic currency conversion (DCC) processes.
Payment processors typically charge around 1% for currency conversions, but with DCC, fees can surge up to 12%. DCC has been labeled as a potential scam, highlighting the significant cost disparity.
Differentiating the two methods is crucial regarding the immediacy of cost disclosure. While payment processor fees reveal the converted amount only when statements arrive, DCC offers real-time visibility on receipts or point-of-sale terminals.
As DCC tends to be more expensive, you must weigh the benefit of instant cost knowledge against potential extra charges. Importantly, DCC doesn’t replace foreign transaction fees; both fees apply unless you decline DCC, as merchants can’t enforce it without your consent.
How the Fees Can Add Up
The foreign transaction fee you pay often encompasses the currency conversion fee. In a scenario where the total fee is 3%, 2% may account for the transaction fee while 1% is the currency conversion fee.
Visa and Mastercard typically levy a 1% currency conversion fee to the card issuer, who may pass it along along with other charges to create a comprehensive foreign transaction fee. Some card issuers, especially catering to frequent travelers, charge no foreign transaction fees.
Refer to the table below for a breakdown of key credit and debit card fees related to foreign transactions.
| Type of Fee | Imposed On | Imposed By | Rate |
|---|---|---|---|
| Foreign Transaction Fee | Overseas credit card transactions | Issuer | 2% to 3% |
| Currency Conversion Fee | Overseas currency conversion | Processor | 1% |
| Dynamic Currency Conversion | Overseas point-of-sale conversion | Merchant | 3% to 12% |
Avoiding (or Minimizing) These Fees
It is advisable to aim for fee-free transactions when traveling. Here are strategies to help cut down or eliminate fees while spending abroad:
- Review your card’s fees in the “terms and conditions” section and consider applying for a fee-free card before your trip.
- Prioritize acquiring some local currency before departure to reduce ATM visits and their associated charges.
- Explore if your bank is affiliated with a global ATM network to access low-cost or zero-fee withdrawals.
- Beware of misleading ATMs disguising DCC options.
- Opt to pay in local currency and reject DCC offerings from merchants.
- Using cash can also avoid fees, but ensure to balance convenience with security concerns.
Who Sets the Interest Rate on Dynamic Currency Conversions?
In dynamic currency conversions (DCC), merchants and their banks determine the rate, which can differ across stores. Merchants might be incentivized to promote DCC due to its profitability.
Is It Better to Use a Credit or Debit Card Abroad?
Credit cards offer advantages over debit cards for international travel. They commonly provide rewards like cashback or airline miles, along with superior consumer protections. With credit cards, liability for unauthorized charges is often limited to $50 or even $0 by some issuers, compared to potential full account depletion from debit card theft.
Can You Just Use U.S. Dollars in Other Countries?
Yes, many countries, such as Canada and Mexico, widely accept US dollars, with some even adopting the dollar as their official currency. However, confirm acceptance before relying solely on USD during your visit.
The Bottom Line
Planning a trip abroad or across borders can be more cost-effective by minimizing foreign transaction fees. Prioritize enjoying travel experiences over unnecessary financial burdens.
