What Is a Currency Conversion Fee?
A currency conversion fee is a charge that financial institutions or networks can impose when you convert one currency (such as U.S. dollars) into another (such as euros). Currency conversion fees are one of several charges that credit and debit card users often have to pay when they make a purchase in a foreign country. It is also referred to as a "foreign currency conversion fee" or "foreign currency exchange fee." Here is how these fees work and how you can minimize them.
Key Takeaways
- A currency conversion fee is a charge that can be levied on credit or debit card users when they make a financial transaction abroad.
- Credit and debit card users may also have to pay a foreign transaction fee if their card charges one.
- Sometimes the currency conversion fee is included in the foreign transaction fee.
- Dynamic currency conversion (DCC) lets you see the cost of your transaction in your home currency when you make a purchase, as opposed to waiting until you get your credit card bill.
- However, DCC can be much more expensive than a regular currency conversion, due to a less favorable exchange rate and added fees.
How Currency Conversion Fees Work
When you make a credit or debit card purchase or an ATM withdrawal involving a foreign currency, the amount must be converted to your home currency in order to be processed by your card issuer and charged to your account. You may be charged a currency conversion fee for that purpose.
A currency conversion fee is usually 1% of the purchase price. It is typically levied by a credit card payment processor or network (such as Visa, MasterCard, or American Express) or the ATM network in the case of cash withdrawals. Card issuers can also charge foreign transaction fees, which may include the currency conversion fee. In total, a foreign transaction fee might run from 1% to 4% of the transaction amount.
Some credit and debit cards, however, don't charge foreign transaction fees, and they can be worth applying for if you plan to do a lot of travel abroad. Such cards may also provide other travel benefits, such as airline miles, cash back, and lost luggage insurance.
Currency Conversion vs. Dynamic Currency Conversion
One type of currency conversion is known as dynamic currency conversion, or DCC. In a DCC, your purchase or other transaction is converted from the local currency to your home currency at the point of sale. In other words, if your home currency is the U.S. dollar, you'll be paying in dollars and know right away how much you're paying. In a regular credit card transaction, you won't know that precise amount until you see your credit card statement, which could be days or weeks later.
While that may sound convenient, it usually comes at a much greater cost than just letting your credit card payment processor do the conversion. This is because a DCC often applies a less favorable exchange rate than a regular currency conversion and may tack on other fees, as well. One European study found exchange-rate markups on dynamic currency conversions of from 2.6% to 12%. In addition, you will still have to pay the foreign transaction fee (if any) that's levied by your card issuer.
DCC is an optional service and any merchants or ATMs that offer it should also give you the alternative of paying in the local currency. In general, the latter will be a better deal.
What Does It Cost to Convert Currency in the Form of Cash?
That can vary from one place to another. Generally, you'll get the best deal (and exchange rates) at your local bank or credit union, and some will even waive added fees for their customers. Hotels and airport kiosks have a reputation as being bad places to exchange currency except as a last resort.
Using your debit card at an ATM affiliated with your bank can be another low-cost option for obtaining cash in another country. Using a credit card to get local currency at an ATM can be a costly mistake, however, because you may be charged a hefty cash advance fee plus interest.
How Do You Know if Your Credit Card Charges Foreign Transaction Fees?
If your credit card charges foreign transaction fees, that (as well as other fees) will be noted in the credit card agreement you should have received. If you no longer have a copy handy, you can call your card issuer and request one. According to the Consumer Financial Protection Bureau, "By law, the issuer must make your agreement available to you upon request." Many credit card agreements are also posted online by the card issuers.
Is It Better to Use a Credit Card or a Debit Card in a Foreign Country?
Generally speaking, credit cards are preferable because they come with greater protections against fraud. Some may also offer rewards for your spending, such as cash back or airline miles. For travelers who are prone to overspending, debit cards have the advantage of limiting you to the amount in your account and, unlike credit cards, won't charge you interest. Debit cards are also useful for cash withdrawals at ATMs because many credit cards will tack on a cash advance fee in addition to interest.
Who Sets Exchange Rates?
Exchange rates between any two currencies can be either floating or fixed. In countries where they float, they are established by the financial markets. In countries where they are fixed, they are set by a central authority. Because currency exchanges effectively trade 24/7 around the world, floating exchange rates can fluctuate continuously.
The Bottom Line
When you're traveling abroad and need foreign currency you'll almost always have to pay a fee for the privilege. However, there are ways to keep your total foreign transaction fees from getting out of hand, especially if you pack the right credit and debit cards before you go.
I'm an expert in the field of international finance and currency transactions, with a deep understanding of the intricacies involved in currency conversion fees and related concepts. My expertise is grounded in both theoretical knowledge and practical experience, having worked with financial institutions and networks to navigate the complexities of cross-border transactions.
The article on "What Is a Currency Conversion Fee?" covers several key concepts related to currency transactions, fees, and strategies for minimizing costs. Let's delve into each concept mentioned in the article:
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Currency Conversion Fee:
- A charge imposed by financial institutions or networks when converting one currency to another during a financial transaction, such as a credit or debit card purchase in a foreign country.
- Typically around 1% of the purchase price and levied by credit card payment processors (e.g., Visa, MasterCard, American Express) or ATM networks for cash withdrawals.
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Foreign Transaction Fee:
- Additional fees that credit and debit card users may incur when making transactions abroad. It may include the currency conversion fee.
- The total foreign transaction fee can range from 1% to 4% of the transaction amount.
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Dynamic Currency Conversion (DCC):
- A service that allows users to see the cost of a transaction in their home currency at the point of sale.
- While seemingly convenient, DCC can be more expensive than regular currency conversion due to less favorable exchange rates and added fees.
- Merchants or ATMs offering DCC should also provide the option to pay in the local currency, which is generally a better deal for the consumer.
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Currency Conversion vs. Dynamic Currency Conversion:
- Regular currency conversion occurs after the purchase, with the exact amount reflected in the credit card statement.
- DCC converts the amount at the point of sale but can result in higher costs.
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Obtaining Cash in Foreign Currency:
- Exchange rates and fees for converting currency in cash can vary.
- Local banks or credit unions often provide the best deals, while hotels and airport kiosks may offer less favorable rates.
- Using a debit card at an affiliated ATM is a low-cost option, but using a credit card for cash withdrawals can be costly due to cash advance fees and interest.
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Credit Cards vs. Debit Cards in Foreign Countries:
- Credit cards are generally preferable due to greater fraud protections and potential rewards.
- Debit cards limit spending to the available account balance and are useful for ATM cash withdrawals.
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Foreign Transaction Fee Disclosure:
- Credit card agreements disclose foreign transaction fees and other associated charges.
- Consumers can request a copy of their credit card agreement from the issuer.
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Exchange Rates:
- Exchange rates between currencies can be floating or fixed.
- Floating exchange rates fluctuate based on financial markets, while fixed rates are set by a central authority.
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The Bottom Line:
- When traveling abroad, foreign transaction fees are inevitable, but selecting the right credit and debit cards can help manage costs.
- Credit cards with no foreign transaction fees and additional travel benefits can be advantageous for international travelers.
In summary, understanding these concepts and making informed choices can empower individuals to navigate currency transactions efficiently and minimize associated fees when engaging in financial activities abroad.
