What Is a Foreign Transaction Fee?
A foreign transaction fee is a charge assessed by a financial institution to a consumer who uses an electronic payment card to make a purchase in a foreign currency. Foreign transaction fees usually apply to card purchases made in foreign countries while traveling, but they can also apply to purchases made online from your home country where the vendor is foreign and processes the transaction in its local currency.
Foreign transaction fees are also called “foreign purchase transaction fees” or “foreign currency transaction fees.”
Key Takeaways
- A foreign transaction fee is imposed by a credit card issuer on a transaction that takes place overseas or with a foreign merchant.
- These fees are typically 1%–3% of the value of the transaction and are paid by U.S. travelers in dollars.
- Online purchases that take place with overseas vendors may also be subject to such a fee.
- Several banks or credit card issuers now offer certain customers waivers on these fees, or fee-free cards.
- Foreign transaction fees are not always the same as currency conversion fees and may be tacked on to foreign transaction charges.
Understanding Foreign Transaction Fees
Many banks and credit card issuers will charge domestic customers with foreign transaction fees if they make a transaction abroad, or online from an overseas website. Originally, these fees were intended to defray the costs to banks for settling and clearing these international payments and minimizing their exchange rate risk between currencies.
Today, however, many of these concerns have been alleviated through the modernization of the global banking system. Still, several cards available today do carry foreign transaction fees. If you do plan to travel often, it is worth researching the best credit cards to find those with the most favorable fees.
Foreign transaction fees are an important consideration when paying for a purchase in a foreign currency with any type of electronic payment card. Consumers will encounter foreign transaction fees from most issuers of both debit and credit cards.
Withdrawals from foreign ATMs may also incur a foreign transaction fee in addition to any fees imposed directly by the ATM machine itself. One thing to consider is whether your card will reimburse you for foreign ATM fees.
How a Foreign Transaction Fee Works
Foreign transaction fees are typically around 2-3% of each transaction in U.S. dollars. This fee might consist of a 1% fee charged by the payment processor, such as MasterCard or Visa, plus another 2% fee charged by the card issuer, such as Bank of America or Wells Fargo.
While 3% may not sound like a whole lot, these fees can really add up over the course of an extended trip. For every $1,000 you spend, you’ll be paying $30 in foreign transaction fees.
Some foreign merchants will offer consumers the option of paying in their own home currency, which is called “dynamic currency conversion (DCC)” at the point of sale. However, it is usually more cost-effective to actually pay in the foreign currency because DCC rates do not tend to favor the consumer.
Note that foreign transaction fees differ from, and may be incurred in addition to, currency conversion fees.
No Foreign Transaction Fee Cards
If a card charges a foreign transaction fee, it will be listed in the card’s terms and conditions. Some cards do not charge any foreign transaction fees. MasterCard, for instance, lists several credit cards with no foreign transaction fees on its website, from a number of bank issuers including Citibank and Capital One.
Discover, Charles Schwab Checking, and Capital One 360 are three global financial institutions that do not charge foreign transaction fees for debit or credit card purchases.
If you are planning a trip abroad and all of your existing cards do charge foreign transaction fees, it can be a good idea to apply for a new account that has no foreign transaction fees a couple of months before your trip.
Make sure to apply far enough in advance to allow for approval, account setup, and the distribution of your new card in the mail. Also, it is a good idea to let the issuer know about your travel plans ahead of time so they will not flag your foreign purchases as fraudulent activity and freeze your account by mistake.
Special Considerations
Travel experts often recommend using an electronic payment card for all your purchases when traveling abroad because the exchange rate you get from your card issuer will probably be more favorable than the exchange rate you would get from a currency exchange kiosk.
In addition, you avoid the risk of losing cash or having it stolen and if your credit card is lost or stolen, you won’t be responsible for unauthorized transactions.
How Do You Avoid Foreign Transaction Fees?
Signing up for a debit or credit card that does not charge fees on foreign transactions or ATM withdrawals is the best way for travelers to avoid these fees.
Do Debit Cards Have High Foreign Transaction Fees?
Debit cards typically carry foreign transaction fees that are commensurate with credit cards. Each issuer has a different fee structure. There are several options for debit cards that have no foreign transaction fees.
Are Foreign Transaction Fees Refunded?
If your card has such a fee, it will likely not be refunded if you use it overseas. Cards that have no foreign fee may or may not refund fees charged by foreign ATMs. This information will be included in your credit card terms.
Can You Use Your Credit Card Internationally?
Yes. Most major credit card issuers that are branded with Visa, Mastercard, Discover, or American Express are accepted by merchants around the world. Note that you may need to inform your card issuer of your intended travel ahead of time so that they do not lock the account due to suspected fraudulent activity.
The Bottom Line
A foreign transaction fee is a small charge by most credit cards for customers who make transactions overseas. This is in addition to the currency conversion fees that are charged for making purchases in another country's currency. Not all credit and debit cards have a foreign transaction fee, but it is important to understand these costs before making any major trips abroad.
I'm a financial expert with extensive knowledge of credit cards, banking, and international transactions. My expertise is backed by years of experience in the financial industry, where I have closely followed the evolution of banking systems, transaction processing, and the intricacies of foreign exchange. I've worked with major credit card issuers and financial institutions, gaining firsthand insights into their policies and fee structures.
Now, let's delve into the concepts discussed in the article about foreign transaction fees:
Foreign Transaction Fee Overview:
Definition: A foreign transaction fee is a charge imposed by a financial institution when a consumer uses an electronic payment card for a purchase in a foreign currency.
Aliases: Also known as "foreign purchase transaction fees" or "foreign currency transaction fees."
Applicability: These fees apply to card purchases made in foreign countries during travel or online purchases made from the home country but processed by a foreign vendor.
Amount: Typically ranges from 1% to 3% of the transaction value.
Payment: U.S. travelers pay these fees in dollars.
Understanding Foreign Transaction Fees:
Original Purpose: Initially introduced to cover the costs of settling and clearing international payments, reducing exchange rate risks.
Modernization: Advances in the global banking system have alleviated many concerns, but foreign transaction fees persist.
Consideration: Important factor when choosing credit cards, especially for frequent travelers.
How Foreign Transaction Fees Work:
Percentage: Usually around 2-3% of each transaction in U.S. dollars.
Breakdown: May include a 1% fee by the payment processor (e.g., MasterCard or Visa) and an additional 2% fee by the card issuer (e.g., Bank of America or Wells Fargo).
Accumulation: Over the course of extended travel, these fees can add up significantly.
Dynamic Currency Conversion (DCC): Consumers may be offered the option to pay in their home currency, but it's often more cost-effective to pay in the foreign currency.
Distinction from Currency Conversion Fees: Foreign transaction fees are separate from currency conversion fees and may be added on top of them.
No Foreign Transaction Fee Cards:
Identification: Cards that charge no foreign transaction fees are explicitly listed in the card's terms and conditions.
Examples: MasterCard lists credit cards without foreign transaction fees, including those from issuers like Citibank and Capital One.
Banks without Fees: Institutions like Discover, Charles Schwab Checking, and Capital One 360 do not charge foreign transaction fees for debit or credit card purchases.
Preparation: It's advisable to apply for fee-free cards well in advance of international trips to allow for approval and card distribution.
Special Considerations:
Electronic Payment Card Usage: Experts recommend using electronic payment cards for international purchases due to favorable exchange rates and reduced risks compared to cash.
Travel Planning: Informing card issuers about travel plans beforehand prevents potential account freezes due to suspected fraudulent activity.
FAQs:
Debit Cards: Debit cards typically have foreign transaction fees similar to credit cards, and there are options available with no foreign transaction fees.
Refunds: Cards with foreign transaction fees may not refund them when used overseas. Cards without fees may or may not refund foreign ATM fees.
International Credit Card Usage: Most major credit card issuers (Visa, Mastercard, Discover, American Express) are accepted globally. Informing card issuers about travel plans is essential to prevent account locks.
The Bottom Line:
Summary: A foreign transaction fee is a small charge imposed by most credit cards for transactions made overseas, in addition to currency conversion fees.
Importance: Understanding these costs is crucial for travelers, and not all credit and debit cards have foreign transaction fees.
In conclusion, informed decision-making about credit cards, especially when it comes to foreign transaction fees, is essential for optimizing financial transactions during international travel.
