Dubai: Ever got hit by an unusually high one-off credit charge when travelling overseas? It’s likely a foreign transaction fee that may not be visible at first glance, but unavoidable when incurred.
Credit card fees, often viewed as a highly intricate web of numbers, can seem to get more complex when piled on by two more fee types, namely ‘currency conversion’ and ‘foreign transaction’ fees.
As these two fees sound similar, they are often confused for one another, because both these fees are often combined and referred to as a single foreign transaction fee when you transact abroad.
Given that these little charges are often buried in your credit card agreement, you may wonder: What exactly are these fees? Are they always the same? Are there cards that don’t charge such fees?
Foreign transaction fee versus currency conversion fee: Know the difference
While a foreign transaction fee is imposed by a credit card issuer on a transaction that takes place overseas or with a foreign merchant, a currency conversion fee is imposed by credit card payment processor on the same transaction to convert from one currency to another.
When all do you incur such transaction fees overseas?
When you make a purchase with your resident-country issued credit or debit card in a foreign country, be it in-store or online with a company based in a foreign country, the card issuer, usually a bank, may charge a foreign transaction fee of 2 per cent to 3 per cent of the purchase price.
This can be incurred even if you withdraw cash from an ATM abroad. Whether you pay the fees depends on the credit card or ATM network you use, as not all credit cards charge a per-transaction fee on purchases or withdrawals made overseas or when ordering online with a foreign merchant.
At the same time, the credit card payment processor, typically Visa, MasterCard, or American Express, will tack on an additional 1 per cent of the purchase price to convert your purchase from the foreign currency to your residing country’s currency. This is known as a currency conversion fee.
How foreign transaction fees are calculated: Here are two examples
Alternatively, suppose you run out of cash and decide to use an ATM that charges a 3 per cent transaction fee to obtain Dh1,000 equivalent in euros. The actual cost to you will be higher than Dh1,000 worth of euros, depending on your card-specific policy.
At times the foreign transaction fee is also called a foreign exchange fee. Often the foreign transaction fee you pay includes the currency conversion fee. For example, your total fee might be 3 per cent, with 1 per cent consisting of the currency conversion fee and 2 per cent accounting for the transaction fee.
Here’s another example: Imagine you pay 82 euros (Dh317) while on vacation in Spain, using a card on the MasterCard network that has a 2 per cent issuing bank fee. With the currency conversion, this works out to $100 (Dh367). Based on that amount, MasterCard will charge 1 per cent on top of each purchase.
Then, the issuer will charge another 2 per cent on top of that, equalling $103 or Dh378. This might not seem like much, but an extra 3 per cent on top of each of your individual vacation expenses can quickly add up.
Overseas charges vary with each credit card brand
Visa and MasterCard charge a 1 per cent currency conversion fee to the card issuer. Like mentioned above, the card issuers can combine the two (currency conversion and foreign transaction fees) and call it a foreign transaction fee.
Some card issuers, especially travel cards, charge no fee at all. American Express, which does not use Visa or MasterCard to process payments, charges a 2.7 per cent fee on some cards and waives the fee on others.
The rate varies between credit cards, but it generally ranges between 2.7 per cent and 3 per cent of the converted transaction price. American Express, Discover, MasterCard, Visa, and other major credit card networks all charge different amounts. Each of these may represent more than one network and fee.
‘Dynamic currency conversion’ (DCC), a fix or trap?
When you’re traveling abroad, a merchant may give you the option to convert your charges to US dollar instead of the local currency, in a process called ‘dynamic currency conversion’ (DCC). However, experts advise against choosing DCC, as you’ll almost always end up paying more.
The problem is that DCC nearly always results in unfavourable exchange rates. When a merchant processes your payment using DCC, they get to set the currency exchange rate, and this can add as much as an additional 7 per cent to the transaction.
Merchants are incentivised to pick an unfavourable rate, as this pads their profits as well as those of the third-party DCC service provider. To avoid being overcharged, choose to pay in the local currency instead. The conversion will be handled automatically by your card network using their exchange rate.
Another reason why experts caution to be extra careful is that you may still end up getting charged a foreign exchange fee even if you use ‘dynamic currency conversion’ and the transaction is performed in US dollars. All that needs to happen is for the transaction to pass through a foreign bank.
Sometimes a card issuer specifically spells out how this is handled. The terms and conditions may specify if there’s a fee for foreign transactions in US dollars versus local currency. If your card issuer only specifies local currency fees, this means they don’t charge for transactions in US dollar.
Is there a way to avoid such foreign transaction fees?
Whether it’s a foreign transaction or currency conversion fee, it’s always better to pay no fee. In order to avoid or minimise fees when traveling and spending abroad, check your card’s fees under ‘terms and conditions’ and, if appropriate, apply for a ‘no fee’ card before you travel.
Another tip from credit experts is to get some cash before you leave home to minimise trips to an ATM. It’s usually wise to have local cash on hand when traveling in a foreign country.
However, you can incur both international transaction fees and out-of-network ATM fees when withdrawing cash outside the country you are residing. Make sure that you use an ATM card that reimburses ATM fees.
It’s also important to check whether your bank is part of a ‘no fee’ or ‘low cost’ global ATM network first-hand. You should also get a debit card that does not charge foreign transaction fees.
Some ATMs also try to hit you with DCC, so avoid that as well. This ensures you’ll receive the wholesale currency exchange rate that day.
It’s still best to use your credit card whenever possible, as long as it has the benefit of no foreign transaction fees. You’ll avoid paying extra and you’ll also enjoy the protections offered by your card issuer.
One way to avoid foreign transaction fees is to obtain a credit card that does not charge forex fees and use it when traveling abroad or making purchases from foreign merchants.
Which credit cards have no foreign transaction fees?
Many co-branded hotel and airline cards carry no foreign transaction fees, while premium travel rewards cards (i.e., travel rewards cards with high annual fees) also typically don’t charge foreign transaction fees.
Cards with no annual fees or foreign transaction fees are rarer, but there are at least a handful on the market.
As mentioned above, make sure you choose to pay in local currency instead of using ‘dynamic currency conversion’ or DCC. You’ll generally get the best exchange rate this way and won’t be charged any extra fees.
Credit card networks flag transactions as ‘foreign’ if, at any point, the transactions pass through a foreign bank. Some purchases, such as online purchases from foreign merchants shown in foreign currency, will incur foreign transaction fees.
You could be charged a foreign transaction fee if a purchase occurs from a merchant located overseas, a purchase is in a foreign currency and purchase is routed through a foreign bank.
While it’s important to keep foreign transaction fees in mind, don’t be scared off from using a credit card while traveling internationally. There are a lot of benefits you can gain from using one.
You can avoid paying foreign fees if you pick up the right credit card before you travel. Make sure to compare credit cards to see which option might offer the most perks for your needs, including no foreign transaction fees.
Besides having the potential to earn rewards, using a credit card overseas is a great way to score zero fraud liability coverage. This means that if your credit card is lost or stolen abroad, you won’t be on the hook for a single cent of fraudulent purchases.
No matter what your travel budget is, try to avoid foreign transaction fees for a simple reason: They increase the cost of your purchase without adding any value. Fortunately, you can eliminate or reduce the fees you’ll pay with a little planning.