For every local cuisine sampled, every hostel slept in, every train traveled in, you can almost guarantee that a credit card will have an overseas American consumer paying more than they bargained for. You think you shelled out $5,000 for a Mediterranean Riviera honeymoon? Try an extra $150 to $200 on top of that, just for spending abroad.
Foreign transaction fees are the euphemism for what credit card companies call these extra dollars. These charges are applied to every credit purchase made with a merchant beyond U.S. soil, and therefore remain separate from a currency conversion fee.
Unfortunately, these fees are more common to run across than you might think. According to Time magazine, approximately 82 percent of credit cards on the market have foreign transaction fees. In fact, out of more than 100 of Credit Card Select’s best credit cards, only 11 offer no foreign transaction fee.
But why do credit cards have a foreign transaction fee? Chalk it up to the cost of using plastic.
“Foreign credit card transaction fees are norm for uses and bank exposures to risk,” says Jim Angleton, President and CEO of AEGIS FinServ Corp. “The cost of maintaining a card platform in a world filled with fraud, theft, human error, cost structure change, [foreign exchange] differentials and merchant demands is sort of likened to a ‘reverse engineering’ of those liabilities whereby the consumer and merchant pay.”
While these fees may be a revenue booster for financial institutions, they may only hurt consumer wallets.
“If a consumer heavily relies on plastic and their card issuer or bank is charging three percent on every transaction, the charges can certainly add up,” says Maria Brusilovksy, director of marketing at Travelex Currency Services, Inc.
By learning about the most highly misunderstood aspects of these fees and how to avoid them, you can curb unnecessary costs the next time you travel.
Things You May Not Know About Foreign Transaction Fees
You may accept the expense of a foreign transaction fee in order to cash in on a particular credit card’s other benefits. But what you may not realize is that you’re likely getting charged more than you thought for that foreign transaction fee.
According to Paul McTaggart of Dental Departures, who works daily with customers to mitigate many credit card fees, says issuing banks have the option of charging up to 3 percent on top of the 1 percent a network like Visa or MasterCard might charge.
“This means consumers with some cards get charged 4 percent when they are overseas,” says McTaggart. “Some companies choose to absorb the 1 percent fee charged by Visa/MasterCard. One example would be Capital One who charges no fees for foreign transactions.”
Another surprising fact about foreign transaction fees is that they can show up on your bill statement without ever leaving home.
For example, if you purchase a first class ticket from a foreign air carrier or you buy a unique piece of jewelry from an overseas merchant, the transaction is likely processed by a non-U.S. institution. As a result, these purchases would fall under the foreign transaction fee umbrella.
Tips to Avoid Credit Card Foreign Transaction Fees
Foreign transaction fees may be a financial sore spot for consumers, but they can be avoided through the card and payment choices that you make.
Stay on top of currency exchange rates. This is not necessarily a shortcut to avoiding foreign transaction fees, but if you choose to use a card that charges them, you’ll want to take advantage of the best exchange rates in order to pay less overall.
Brusilovsky recommends using a site like Currency Rate Tracker so that you can determine when prices are in your favor. Additionally, Travelex offers chip-and-PIN cards in foreign denominations so that you can lock in the best rates and avoid foreign transaction fees from the start.
Read the fine print of a card’s terms and conditions. The simplest way to avoid foreign transaction fees is to select a credit card that doesn’t carry them.
“Look for a paragraph labeled ’Foreign Transactions’ or ‘Foreign Transaction Fees’ or ‘Foreign Exchange Fees’ when you sign-up for a credit card,” advises McTaggart. “The credit card companies are obligated to disclose these fees since they had to pay a huge fine after losing a major court case for not disclosing them.”
However, you will also have to weigh what features you may be trading for no foreign transaction fees. Consider if the card will meet your needs or if you’ll have to pay more in an annual fee that anything you might spend abroad.
“No two credit cards are alike and therefore, many are issued with specific purposes and caution the consumer to pay attention to the uses and services behind that card,” adds Angleton.
Use an international bank. Betsy Talbot of Married with Luggage advises using an international bank to save money as well as provide you with an extra layer of convenience.
“We use HSBC, which has ATMs in many cities in the world where we can withdraw money without a fee and get help if we have a problem,” Talbot says. “We’ve met many travelers who have funds stopped or fees added when withdrawing from a U.S. bank overseas.”
Credit card foreign transaction fees may be common, but they’re not impossible to avoid. Whether you minimize their impact through spending and currency conversion tracking, or elect to use a card without them, understand that the final decision rests with you.
