The Ultimate Guide to Credit Cards
Saturday, June 15, 2024

What is a Foreign Transaction Fee? How They Work & How to Avoid Them

How Foreign Transaction Fees Work
Eric Bank

Written by: Eric Bank

Eric Bank
Eric Bank

Eric Bank is an M.B.A. who has covered financial and business topics since 1985, appearing regularly on Credible, eHow, WiseBread, The Nest, Zacks, Chron, and dozens of other outlets. Eric specializes in taking complex subject matters and explaining them in simple terms for consumer audiences, particularly in the world of personal finance. Eric holds a Master's in Business Administration from New York University and a Master's in Finance from DePaul University.

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Edited by: Jon McDonald

Jon McDonald
Jon McDonald

Jon leverages 15-plus years of journalism expertise to inform financial consumers about emerging trends and companies making an impact in the industry. He is most knowledgeable in the areas of budgeting, credit card rewards, and responsible credit use. Jon has a passion for writing and editing, and his articles have appeared in publications produced by The New York Times.

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Reviewed by: Andrew Allen

Andrew Allen
Andrew Allen

For nearly 20 years, Andrew has worked for financial institutions ranging from regional investment organizations to some of the largest banks in the world. At Wells Fargo, Andrew was a Consultant within the Insight and Innovation division. A graduate of the University of Georgia’s Terry College of Business, Andrew’s goal has been promoting personal financial wellness and solid money decisions.

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Advertiser Disclosure

What do a Swiss cuckoo clock, a box of Belgian chocolates, and a bottle of French champagne have in common? Many credit cards charge an extra fee when you buy these items from their native countries.

A credit card foreign transaction fee is a charge you pay when you use your credit card outside your home country. This fee applies to each purchase you make in a foreign currency. The best way to avoid the cost is to get a credit card that doesn’t impose it, although many such cards charge an annual fee.

How Credit Card Foreign Transaction Fees Work

When traveling out of the country, it is essential to know whether your credit card charges a foreign transaction fee. Even international purchases in a foreign currency that you make from your home country may be subject to the same fee.

Typical Rates and Fee Structures

Most credit card companies charge a foreign transaction fee that is between 1% and 3% of each purchase you make in a foreign currency. So, if you spend $100 abroad, you would typically pay an extra $1 to $3. These fees can add up quickly if you travel often or make many purchases from foreign websites.

Credit card issuers have different fee structures for foreign transactions. Some charge a flat rate, although most have a percentage-based fee. When choosing a card, you want to compare these rates, especially if you travel frequently.

Currency Conversion and International Transactions

When you use your credit card abroad, it exchanges the local currency for your home currency. This process is called currency conversion. The conversion rate can vary daily, so the amount you pay in your home currency may differ from what you expect.

International transactions go through a credit card network such as Visa, Discover, American Express, or MasterCard. When you buy something in a foreign country, the credit card network manages the transaction and ensures the money goes from your bank to the foreign seller.

credit card networks
Credit card networks facilitate international transactions.

When you use your credit card abroad, foreign banks become involved. They process the payment in their local currency, communicate with your bank to complete the transaction, and may charge their own fees.

How They Affect Cardholders

Shopping abroad can incur extra costs, including local taxes, unfavorable currency conversions, and U.S. customs charges upon return. International online purchases may escape the customs duties but are likely to charge a shipping fee. Let’s look at a couple of examples.

Increased Total Cost of Purchases

Let’s say you buy a dress shirt for 50 British pounds (£) while shopping on High Street while visiting London. The British tax rate (VAT) is 20%, so the tax adds £10, making the shirt cost £60.

For conversion, let’s assume the exchange rate is 1£ = $1.30 in U.S. dollars. So, £60 converts to $78. If your credit card has a 3% foreign transaction fee, you will pay an extra $2.34 (3% of $78).

You may need to pay customs tax when you return to the United States. Let’s assume the customs tax rate is 5%. So, the customs tax on $78 is $3.90, and the total cost of your dress shirt will be $78 + $3.90 + $2.34 = $84.24. I hope you love that shirt!

Long-Term Effects for Frequent Travelers

Frequent travelers need to think carefully about foreign transaction fees. These fees can add up quickly if you travel often and make many purchases abroad. Over time, paying 3% extra on every purchase can become very expensive.

Consider looking for a credit card that doesn’t charge foreign transaction fees. Many travel-focused credit cards provide this benefit. This can save you a lot of money in the long run.

It’s also important to check the exchange rates your credit card uses. Some cards have better rates than others, which can impact how much you pay when you make purchases in a foreign currency.

Shopping Online with International Merchants

Let’s revise our London shirt example: You make the same purchase online in a state with no sales tax. You won’t have to pay customs duty, but you will be on the hook for shipping fees — in this case, £15. The total before fees is £75, which converts to $97.50. 

If your credit card has a 3% foreign transaction fee, you will pay an extra $2.93 (3% of $97.50). So, the total cost of your dress shirt will be $100.43.

Watch out for merchants who are more likely to trigger foreign transaction fees on purchases with a credit card. Consider the following factors:

  • Location: You’ll usually pay a foreign transaction fee if the merchant is outside your home country, including online stores in other countries.
  • Currency: If you make a purchase in a foreign currency, you may have to pay a foreign transaction fee. Check the currency listed at checkout.
  • Billing Address: The fee will typically appear if the merchant’s billing address is in another country. You can find this information in the payment section of your credit card statement.
  • Credit Card Statement: Review your credit card statement for fees labeled as “foreign transaction fee” or “international transaction fee.” This can help you identify which merchants charge these fees.
  • Credit Card Terms: It’s always wise to read your terms and conditions. You want to know the issuer’s foreign transaction policy, including rates and exceptions.

Ultimately, the ideal credit card has no fees for foreign transactions or currency conversions and uses a competitive exchange rate. Even better — a card that includes all of those perks and has no annual fee.

Consider a Credit Card with No Foreign Transaction Fees

A card with no foreign transaction fees makes sense if you ever plan to travel or purchase abroad. Let’s see how that shakes out:

Benefits of No-Fee Cards

Using credit cards with no foreign transaction fees can save you money because you won’t pay extra when you make purchases abroad. This can add up to significant savings, especially if you travel often. 

You also avoid surprise fees on your credit card statement, making it easier to budget for your trip. Even better, many no-transaction-fee cards offer valuable benefits. 

How to Choose the Right No-Fee Card

No-foreign-transaction-fee cards often come with a variety of great perks. Most offer rewards for every dollar spent, which you can redeem for travel, merchandise, cash back, and other items.

These cards frequently provide premium travel benefits, such as free checked bags, priority boarding, and airport lounge access. All of these add a premium touch to your travels.

The following travel cards are among the best of their type and deserve your consideration:

These cards help you save on fees and offer great rewards and benefits. They are excellent choices for travelers, even though some charge an annual fee.

How to Avoid or Minimize Foreign Transaction Fees

Credit cards with no foreign transaction fees are terrific, but you also have other options. These include prepaid debit cards, foreign currency accounts, and mobile apps.

Some general tips for avoiding unexpected charges include:

  1. Use a Credit Card with No Foreign Transaction Fee: Choose a credit card that doesn’t charge foreign transaction fees or surcharges for currency conversions. Several travel-focused cards offer this feature.
  2. Pay in Local Currency: When given a choice, always pay in the local currency. Dynamic currency conversion, which converts the purchase to your home currency at the point of sale, often includes hidden fees.
  3. Check Card Terms Before Traveling: Review your credit card’s terms and conditions before you travel. Know what fees might apply and look for any special offers or partnerships.
  4. Notify Your Bank: Tell your credit card company about your travel plans so they don’t flag foreign transactions as suspicious, which may lead to declined transactions and extra fees.
  5. Monitor Exchange Rates: Use a competitive exchange rate card to save money on foreign purchases.
  6. Avoid ATMs with High Fees: Use ATMs that charge low fees. Some ATMs abroad charge high withdrawal fees, which can ruin your day.
  7. Consider Prepaid Travel Cards: Prepaid travel cards let you load money in different currencies. These cards often have lower fees and can help you stay within your travel budget.
  8. Use Mobile Payment Options: Services like Apple Pay, Google Pay, or Samsung Pay may have lower fees and offer better exchange rates. Check if these options are available and accepted where you are traveling.

Now, let’s examine some of those tips in more detail to helo you learn how to circumvent foreign transaction fees.

Prepaid Debit Travel Cards and Foreign Currency Accounts

Prepaid debit travel cards are convenient while you travel abroad. You load the card in your home currency, which converts to the local currency when you use it. These cards often have lower fees than credit cards, which saves you money. You can use them for purchases and ATM withdrawals across the globe. 

How to use a prepaid debit card graphic

Foreign currency accounts allow you to hold money in different currencies. You can use these to save money on conversion fees when you travel abroad and take advantage of favorable exchange rates — possibly avoiding some fees. However, these accounts may have higher maintenance fees and require a large initial deposit. 

Prepaid cards and foreign currency accounts have some drawbacks. Prepaid travel cards may have reload fees and limited acceptance in some regions. Foreign currency accounts have higher maintenance costs and less flexibility.

Mobile Payment Solutions

Popular mobile payment apps, including Apple Pay, Google Pay, and Samsung Pay, may offer reasonable exchange rates. These apps use your credit or debit cards when you make payments. Some apps, such as PayPal, offer more favorable exchange rates, which can be a better deal for savvy travelers. 

Using mobile payment solutions abroad is simple. First, you set up your mobile payment app and link it to your credit and debit cards. When you’re abroad, you can use payment terminals that work with contactless payments. 

To pay, you must hold your phone near the terminal to confirm the payment. Terminals may recognize your fingerprint, face, or PIN. Many stores, restaurants, and transportation services accept mobile payments. 

Security is crucial when you use mobile payments abroad. Payment apps typically use advanced encryption and authentication methods, making them safer than cash or physical cards.

mobile payment solutions graphic

However, it’s up to you to keep your phone secure. Use strong passwords, enable biometric authentication, and keep your phone’s software updated.

Be cautious of public wifi networks, as they are less safe. Consider using a VPN for an additional layer of protection. Constantly monitor your accounts for suspicious activity and immediately report any problems to your bank or card issuer.

Bank Partnerships and Special Offers

Some credit card issuers have global partnerships that help reduce or eliminate foreign transaction fees. Examples include Chase, Capital One, and American Express. These partnerships may allow you to use your card abroad without incurring extra costs. Look for cards catering to travelers who want to take full advantage of these benefits.

Credit card issuers often run promotional offers that can help you save on foreign transaction fees. These promotions may include limited-time fee waivers, extra reward points for international purchases, and discounted currency conversion rates. 

Sign up for email alerts from your card issuer and regularly check their website for updates to ensure you know about these types of offers. Also, consider applying for new cards that provide introductory benefits, such as no fees for the first year.

card fee schedule example
Review your card’s fee schedule for information about foreign transaction fees.

Many credit cards offer membership programs with additional benefits, including fee waivers. These programs, such as American Express Membership Rewards, Chase Ultimate Rewards, and Citi ThankYou Rewards, often have options for fee-free foreign transactions. 

The programs may also offer travel insurance, concierge services, and access to exclusive events. Membership programs can help you enjoy your travel experience and save you money on fees. Naturally, you’ll need to review a program’s fine print to understand all of its benefits.

Foreign Transaction Fees Increase the Cost of Traveling Abroad

Foreign transaction fees increase the cost of traveling abroad by making your purchases more expensive. When you use your credit card in another country, you may pay a fee of 3% of the purchase amount. This fee applies to everything you buy abroad, including meals, souvenirs, and hotel stays. Over time, these fees can really add up.

Select a credit card with no foreign transaction fee to sidestep these extra costs. Many travel-focused cards offer this benefit and can save you plenty of money on an international trip. Alternatively, mobile payment apps or prepaid travel cards may allow you to manage your expenses while avoiding high fees. 

Choosing the correct payment method can reduce the impact of foreign transaction fees. This allows you to enjoy your international trip without worrying about all of the additional charges.

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