Seeing as they’re essentially loans, many credit cards come with an abundance of fees and additional charges. When choosing a credit card, most people keep low-interest rates in mind, rewards programs, cashback, annual fees, and more, but few consider the foreign transaction fees until it’s time for them to travel abroad.
Anyone who’s a frequent traveler will know how quickly the foreign transaction fees can add up, which is why choosing a no foreign transaction fee is always a good option.
If you’re interested in applying for a no foreign transaction fee credit card, it’s a good idea to learn as much as possible about what these fees are, how they work when they’re applied, and more. So, let’s take a look.
What is a Foreign Transaction Fee
A foreign transaction fee, also known as an FX fee, is applied when you use your credit card to make a purchase in a different currency, or when the purchase goes through a foreign bank. Unless you’re using a no foreign transaction fee credit card, you can expect to pay anywhere between 1% and 3% in FX fees.
FX Fee = Card Network Fee + Card Issuer Fee
The FX fee comprises of 2 parts, as both your card network and your card issuer can charge it. Your card network, aka Visa/ MasterCard/ Other Networks, charges a 1% fee for all transactions, regardless of the type of card you’re using.
Your card issuers, aka your bank or credit card union that’s provided you with the credit card, sometimes have their own surcharge in addition to the network’s 1%, and this surcharge typically doesn’t go over 2% to 3%.
Certain credit card issuers, however, do not have any additional fees on foreign transactions, and will even cover the 1% fee imposed by the credit card network, meaning you wouldn’t have to pay for anything else except for the cost of your purchase. Those are known as no foreign transaction fee credit cards.
Foreign Transaction Fee vs. Currency Conversion
Besides the foreign transaction fee, you might be charged a currency conversion fee. It’s an entirely different fee that’s not always as straightforward. Just like you have to pay to exchange your money for the local currency at the exchange office or at an international ATM, you’ll also normally have to pay the currency conversion fee when you’re using your credit card abroad. Essentially, you’re paying for converting your foreign purchases into US dollars.
Since the foreign transaction fee and the currency conversion fee charge for different things, you’ll probably have to pay for both of them when you make a transaction.
The conversion fee is controlled by the credit card network, and both Visa and MasterCard, for example, impose a 1% fee on every dollar spent while you’re traveling. They will charge your issuing bank, and your bank will pass the charges on to you.
When & Where the Currency Conversion Fee is Charged
The problem with currency conversion fees is that they’re not immediately obvious. Unlike the foreign transaction fees, conversion fees aren’t listed as a separate charge on your credit card statement. Rather, they’re presented as part of your transactions. To figure out how much you’re being charged for the currency conversion, you’ll either:
1. have to contact your credit card issuer,
2. or you’ll have to manually compare your receipts to the transaction costs on your statement.
Certain credit card issuers do cover the costs of the currency conversion fees in your name, so you won’t encounter any surcharges on your foreign transactions.
Dynamic Currency Conversion
Speaking of currency conversion, there’s one more thing that you should be aware of, Dynamic Currency Conversion, also known as DCC.
When you’re purchasing items abroad, the merchant might offer you to pay in USD rather than in the local currency, a process referred to as DCC, and although it might seem easier for you to accept this offer, it’s best avoided.
Dynamic currency conversion rates and fees are separate from foreign transaction fees and will result in unfavorable exchange rates. The merchant offering you DCC gets to set the exchange rate, and they have every reason to charge more for your currency exchange, as they will make a profit from it. The ultimate price of your purchase can be 3% higher if you accept the DCC.
What Happen When You Pay in Local Currency
When you choose to pay using the local currency, your credit card network will handle the exchange rate and offer you unbiased rates.
Most people who accept the dynamic currency conversion do so in the belief that they won’t be charged a foreign transaction fee.
However, it doesn’t matter if the transaction is performed in USD, if your credit card issuer has foreign transaction fees, you will be charged when purchasing with your credit card abroad.
When Are Foreign Transaction Fees Applied?
The answer here is not as straightforward as it used to be. Before the rise of online shopping, foreign transaction fees would be applied only if you physically went to a foreign country and used your credit card for making purchases there. It’s different now.
Credit card networks and issuers impose foreign transaction fees if your transaction passes through a foreign bank at any point. There are a few occasions when this can happen.
Of course, if you have foreign transaction fees, you’ll have to pay them every time you use your credit card abroad, regardless of whether you’re paying in USD or in the local currency.
If you’re purchasing an item online from a company that’s based outside the US, you will encounter foreign transaction fees. You can also encounter these fees if your transaction is routed through a foreign, non-US bank.
If your credit card has FX fees, it’s a good idea to always check whether a retailer is based outside the US before you make an online purchase.
Foreign Transaction Fees and Credit Card Rewards
Many people who have a rewards credit card that has a cashback program or offers travel rewards choose to accept the foreign transaction fees in the hopes of acquiring more points and more rewards. Unfortunately, it doesn’t work that way.
The problem with foreign transaction fees isn’t only that they’re so high, it’s also that they are not counted toward the total purchases, and cannot be used for rewards spending.
The Benefits of No Foreign Transaction Fee Credit Cards
Because of all the hassle that comes with foreign transaction fees, most people opt out of using their credit cards at all while traveling. However, using cash or debit cards has its own drawbacks. Primarily, it can be dangerous, as pickpocketing is a common occurrence in many famous tourist destinations in foreign countries.
Secondly, if you’re using a debit card and want to withdraw cash in a foreign country, you’re still likely to encounter high fees that most banks impose on foreign ATMs.
Your best option is to use a no foreign transaction fee credit card. With such credit cards, you only pay for the cost of your purchase, and the normal annual percentage rate imposed by your credit card issuer, no additional costs. They offer you all the advantages of shopping with a credit card, you can still collect rewards, and you’ll get the best currency conversion rates.
Other Considerations for No Foreign Transaction Fees Credit Cards
If you’re a frequent traveler, a no foreign transaction fee credit card is your best option, but this isn’t the only feature you should look for in a card. Some of the most common features that go with no FX credit cards include:
Rewards credit cards
Many credit card issuers offer various rewards programs that can be perfect for travelers. Combining a rewards credit card with no foreign transaction fee credit card can allow you to get discounts on hotels, international flights, and many other expenses that come with traveling.
Student credit cards
Exchange students, or simply students who enjoy traveling abroad, can make use of student credit cards with no FX. These cards are primarily designed to help young people build up their credit history, and can offer many benefits. (See Deserve Edu Review)
Secured credit cards
Secured credit cards are different than the typical ones because they need you to make a cash deposit, and your credit card limit will equal the amount of your deposit. They’re typically used for building your credit history or helping you fix your credit score. However, if they have no FX fees, they can be excellent for travelers who don’t want to go over their budget.
Related Reading: Secured Credit Cards Explained.
Tips for Using Your Credit Cards while Traveling
Planning out your budget when you’re traveling can be very stressful, especially when you start doing the math trying to figure out what kind of fees you can accumulate. So as to make your travels as enjoyable as possible and ensure you don’t accumulate any unnecessary fees, there are a few things you should do.
Besides getting a no foreign transaction fee credit card and avoiding dynamic currency conversion, you should:
Avoid using foreign ATMs
As mentioned, many banks impose high fees on foreign ATMs. If you use your credit card to withdraw cash in a foreign country, you’ll typically have to pay a 5% transaction fee, but you might also have to pay interest which can go up to 20%. If possible, avoid using ATMs so you wouldn’t have to pay the high cash advance fees.
Check whether your card can be used in your destination
Both Visa and Mastercard credit cards can be used in most countries across the world, but if your credit card is from another network, it might not be accepted everywhere. To avoid problems, check whether your card can be used in your travel destination before you head off.
Contact your credit card issuer before your trip
Your credit card issuer might think that your card has been stolen if they notice an unusual charge from a foreign country, this can force them to freeze your credit card just in case. This is why it’s in your best interest to notify your issuer before you leave that you will be traveling abroad and using your card.
No foreign transaction fees credit cards are overall an excellent option for world travelers as they will not only ensure you don’t have to pay for any additional fees but will also help you save money with their rewards programs and discounts.
No FX Fees Credit Cards Frequently Asked Questions
Unfortunately, paying your foreign transaction fees will not be counted toward rewards points. As a matter of fact, it can even be possible for them to eat into your rewards. If you’re paying a 3% foreign transaction fee, and your reward rates are at 2%, you’ll actually be left with a 1% net negative.
This is even more problematic if you’re paying a 3% FX fee, and an additional 3% currency conversion fee. This will leave you with a 4% net negative. To avoid this, it’s best to use a no foreign transaction fee credit card. As long as you’re paying your debts on time, your rewards points will be rewarding.
Although it isn’t always required for you to notify your bank or credit union about your travels abroad, it is in your best interest to do so. If your credit card is used in a foreign country, and the transactions seem suspicious to your card issuer, they might decide to freeze your account in the fear that your credit card was stolen.
If this happens, you can always contact your issuer and explain the situation. However, unfreezing a credit card can take anywhere from a few seconds to a few days, potentially leaving you with no money in a foreign country for an extended period of time.
To avoid this, you should always notify your credit card issuer about your travels beforehand, make a Travel Notice, even if you have a no foreign transaction fee credit card.
Paying for your transaction in USD while in a foreign country with a different currency is known as Dynamic Currency Conversion (DCC). This is best avoided, as you will encounter less favorable exchange rates, and might have to pay for additional fees, depending on your credit card issuer.
Paying in local currency is always the best option, as your credit card network will automatically handle all currency exchanges without any biases.
You always have the right to turn down a merchant’s offer for dynamic currency conversion, and it’s in your best interest to do so.
Depending on your credit card network and issuer, if your card has foreign transaction fees, you can expect to pay around 3% for your purchases that go through a foreign bank. Networks such as Visa and MasterCard charge 1% on such transactions, while most issuers charge an additional 2%.
Most credit card issuers will also charge you an additional 3% to 5% on the market exchange rate, for the currency conversion, so your combined fees can come up to 6% or more. This fee isn’t listed in the Pricing and Information, so you will have to check with your issuer whether they will charge you the currency conversion fee.
The best way to avoid paying a foreign transaction fee is by applying for a no foreign transaction fee credit card. Your credit card network will still charge approximately 1% for the foreign transactions, but with these credit cards, your issuer will pay for those fees in your place. You won’t encounter any additional charges.
Many no foreign transaction fee credit cards offer additional rewards and can help you get reward points, or earn discounts on flights or accommodation during your travels.
Another option is to use Cash.
Unless the issuer offers no foreign transaction fee credit cards, it’s very unlikely they will mention this information to you. You can always ask your issuer upfront, or otherwise, check your credit card’s terms and conditions. Because of the Truth in Lending Act, all issuers must disclose the information about the fees in their terms and conditions.
If your card has FX fees, this information will be included in the “Fees” section, where other fees such as cash advance and balance transfer fees are listed.
There are two reasons why you would encounter foreign transaction fees on your online purchases. Firstly, if the retailer is located outside the United States, you will have to pay the foreign transaction fee. You can usually expect to encounter this fee if your transaction is executed in a currency other than USD.
Secondly, even if your transaction was executed in USD, it might have been routed through a foreign bank. It’s difficult to know whether the transaction will be routed through a foreign bank until it’s completed, as most retailers don’t provide this information.
If you have doubts about the legitimacy of foreign transaction fees included in your purchase, it’s best to contact your credit card issuer to address your concerns.
This depends on your credit card issuer, and while most issuers will refund it, it’s still possible that you won’t get a refund on your FX fees. You may be able to contact your issuer and ask for a refund, but it’s not a guarantee that you will get it.
When returning an item, keep in mind the current exchange rates. If a longer amount of time has passed since you’d bought the item, the foreign currency might have gone up or down in value. This will have an effect on the FX fees and will determine how much you’ll be refunded after you return the item.