As they’re essentially loans, many credit cards have fees and additional charges. When choosing a credit card, most people consider low interest rates, rewards programs, cashback, annual fees, and more, but few consider the foreign transaction fees until it’s time 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 credit card with no foreign transaction fee, learning as much as possible about these fees, how they work when used, and more is a good idea. 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 purchase a different currency or when the purchase goes through a foreign bank. Unless you use a credit card with no foreign transaction fee, you can expect to pay between 1% and 3% in FX fees.
FX Fee = Card Network Fee + Card Issuer Fee
The FX fee is comprised of two parts, as both your card network and 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 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 charge 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 an international ATM, you’ll also usually have to pay a currency conversion fee when using your credit card abroad. Essentially, you’re paying to convert your foreign purchases into US dollars.
Since foreign transaction and currency conversion fees are charged for different things, you’ll probably have to pay for both when you make a transaction. The credit card network controls the conversion fee, 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 apparent. Unlike foreign transaction fees, conversion fees aren’t listed as a separate charge on your credit card statement. Instead, they’re presented as part of your transactions. To figure out how much you’re being charged for the currency conversion, you’ll either:
- Have to contact your credit card issuer,
- 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 that 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 purchasing items abroad, the merchant might offer you to pay in USD rather than in the local currency, a process referred to as DCC. Although it might seem more straightforward 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 profit from it. The ultimate price of your purchase can be 3% higher if you accept the DCC.
What Happens When You Pay in Local Currency
When you pay using the local currency, your credit card network handles the exchange rate and offers 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 to make 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 the local currency.
If you’re purchasing an item online from a company based outside the US, you will encounter foreign transaction fees. You can also experience 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 always to check whether a retailer is based outside the US before you make an online purchase.
Foreign Transaction Fees and Credit Card Rewards
Many people with rewards cards, cashback programs, or travel rewards accept foreign transaction fees to acquire more points and rewards. Unfortunately, this doesn’t work. Foreign transaction fees are high, don’t count toward total purchases, and cannot be used for rewards spending.
The Benefits of No Foreign Transaction Fee Credit Cards
Most people avoid using their credit cards while traveling because of the hassle of foreign transaction fees. However, using cash or debit cards has its drawbacks. Primarily, it can be dangerous, as pickpocketing is common 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 the high fees that most banks impose on foreign ATMs.
Your best option is to use a credit card with no foreign transaction fee. With such credit cards, you only pay for your purchase and the standard annual percentage rate imposed by your credit card issuer – no additional costs. They offer all the advantages of shopping with a credit card: You can still collect rewards and 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 a no-foreign-transaction-fee credit card can allow you to get discounts on hotels, international flights, and many other expenses that come with traveling. See reward cards.
Student credit cards
Exchange students or students who enjoy traveling abroad can use student credit cards with no FX. These cards are designed to help young people build up their credit history and can offer many benefits.
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Secured credit cards
Secured cards differ from typical ones because they require a cash deposit, and your credit card limit will equal your deposit amount. 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 exceed their budget.
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Tips for Using Your Credit Cards While Traveling
Planning out your budget when traveling can be very stressful, especially when you start doing the math trying to figure out what kind of fees you can accumulate. You should do a few things to make your travels as enjoyable as possible and ensure you don’t get charged any unnecessary fees.
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 up to 20%. If possible, avoid using ATMs so you won’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 worldwide, 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 that you will travel abroad and use your card before you leave.
Final Word
Credit cards with no foreign transaction fees are an excellent option for world travelers. They ensure you don’t have to pay any additional fees and help you save money with their rewards programs and discounts.