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What to Know About Foreign Transaction Fees
Key takeaways
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Foreign transaction fees typically range from 1% to 3% and apply to purchases made in foreign currency or processed through non-U.S. banks
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Using credit cards with no foreign transaction fees and paying in local currency are effective ways to avoid extra charges
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These fees can significantly add up for frequent travelers, expats, international subscription services, and cross-border online shoppers
Foreign transaction fees are surcharges that credit card holders pay for transactions processed outside the U.S. The fees are typically around 1% to 3% of the price. And you don't have to travel to encounter foreign transaction fees. If you make online purchases from international merchants or subscribe to an app that charges you in a currency other than dollars, you might be paying that 1% to 3% extra.
That small percentage could put you over budget for your dream vacation when you consider the cost of international air fare, accommodations, meals and souvenirs.
In this article, we'll discuss when foreign transaction fees apply and provide 5 tips on how to avoid foreign transaction fees.
How do foreign transaction fees work?
Let's say you have dinner in Rome, and the bill is presented to you in the local currency—lira—and you pay with a credit card. When you get your credit card statement, you learn that your meal cost you more than you had thought.
This is because your payment originated with a foreign bank and was then processed through your bank.
These fees are intended to defray the costs to U.S. banks for settling and clearing international transactions. The typical foreign transaction fee has two parts:
Network fee
Credit card networks manage transactions between merchants and banks. The four major U.S. networks are Mastercard, Visa, American Express, and Discover. Network fees generally make up around 1% of a foreign transaction fee.
Issuer fee
The financial institution that issues the credit card, often a bank, may also assess a fee, typically 2%. American Express and Discover are both networks and issuers.
What types of transactions trigger foreign transaction fees?
Using your card overseas can trigger a foreign transaction fee, and there are other situations where international purchase fees might be assessed. Understanding them may help you avoid the fees—or at least not be surprised by them.
These situations arise when:
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The merchant’s bank is located overseas. Even if a company has a U.S. footprint, they may process their payments in another country
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Purchases are made in foreign currency. If you buy something on eBay or Etsy and the merchant is in another country, they may charge you in their home currency
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International apps or streaming services charge in non-U.S. currency. For example, you may be charged in local currency when you download a travel guide while in another country
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Online retailers process payments outside the country. This may not be immediately apparent when you're shopping, so be sure to pay attention to how and where payments are processed
What is dynamic currency conversion?
When you present your credit card for an overseas transaction, the credit card terminal may offer a choice: Pay in the local currency or convert it into U.S. dollars.
This is called dynamic currency conversion or DCC. It sounds convenient and you might think you'll avoid a foreign transaction fee, but the opposite may be true.
DCC pricing typically includes fees and profit margins for the merchant for providing this currency exchange service. And you still may end up with a foreign transaction fee tacked on.
The solution is easy: Pay in the local currency when possible.
How do I avoid foreign transaction fees?
Foreign transaction fees are not inevitable. Here are 5 ways to avoid or minimize them.
1. Use a credit card with no foreign transaction fees
Many banks issue credit cards that carry zero international transaction fees. You can find such cards that also charge no annual fee. Some may have fees of less than $100, while some premium cards have annual fees of several hundred dollars. You'll have to weigh the value of the services, rewards, and perks that cards offer against their fees.
2. Use local currency while abroad
Using local currency vs. dollars when abroad is a surefire way to avoid foreign transaction fees. You can order foreign currency from your bank for a small fee before you travel and have money in your pocket the moment you step off the plane.
3. Withdraw local currency using fee-free ATMs
If your bank belongs to an international network, you may be able to avoid ATM fees. Some banks also offer debit cards that don't charge foreign transaction fees.
But even if you can't avoid international ATM fees and charges entirely, by withdrawing cash, you're paying a fee once, not on every transaction.
4. Use a prepaid travel card
Prepaid travel cards let you load local currencies for your destinations, thus avoiding foreign transaction fees, but there may be other fees.
5. Research whether international merchants charge extra conversion fees
While a foreign transaction fee is charged by the credit card issuer, a currency conversion fee can be charged by the credit card payment processor or an individual merchant. When shopping abroad, make sure to pay in the local currency and ask about additional conversion fees.
When do foreign transaction fees matter most?
Knowing how much foreign transaction fees are and how they work is very important in certain situations. Mistakes can be costly. It also helps to become familiar with exchange rates and currency conversion fees.
International travel for vacations and other personal reasons is an obvious time when you would encounter foreign transaction fees. Here are some other scenarios where significant foreign transaction fees may come into play:
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Extended stays abroad. Expats may want to keep U.S.-based bank accounts and credit cards in order to maintain their credit score and access to other services. But daily life in another country may open you to many foreign transaction fees
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Frequent cross-border online shopping. Cross-border fees for online purchases can include currency conversion fees, cross-border transaction fees, and additional charges imposed by the payment processor or financial institution
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Business travel. The average international business trip costs about $2,600. Foreign transaction fees can impact the bottom line
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International subscriptions. Consumers may have monthly subscriptions for a wide range of international services, such as software, streaming, snack boxes, and fair trade artisan creations. Foreign transaction fees can add up month after month
FAQs
Foreign transaction fees are surcharges by your bank and/or credit card issuer on purchases made in foreign currency or through a non-U.S. bank. Intended to defray the cost to the bank of processing a foreign transaction, the fees typically range from 1% to 3%.
Purchases from cross-border merchants—even if priced in U.S. dollars—may trigger a fee if they're processed through a non-U.S. bank. Purchases on sites that host merchants from around the world can trigger foreign transaction fees. It's wise to make such purchases using no-foreign-transaction-fee cards.
Many prepaid travel cards are multi-currency, so you can load local currency and avoid foreign transaction fees. Other fees may apply, though. Read the terms and conditions carefully before purchasing.
It's possible that your debit card will incur a foreign transaction fee. Let your bank know you will be using a debit card overseas and monitor transactions carefully, since the funds will be coming out of a checking or savings account immediately.
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