What Are Foreign Transaction Fees?
Updated
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Making purchases while traveling abroad used to mean dealing with currency conversions and traveler's cheques. These days, your credit cards can do a lot of the heavy lifting for you.
But using a credit card to make foreign purchases isn't without its own downsides. In particular, you have to watch out for foreign transaction fees.
What are foreign transaction fees? Basically, a foreign transaction fee -- sometimes called an FX fee for short -- is a fee charged by many credit card issuers when you make a purchase that involves a foreign bank.
Foreign transaction fees help cover the extra costs associated with converting a foreign currency to U.S. dollars (USD). The fees can also help cover any extra risk to the card issuer from dealing with a bank in another country.
If you have a credit card from a U.S. bank, all of your dealings with that bank will be in USD. Any other currency is considered a foreign currency. Any bank outside the U.S. is considered a foreign bank.
With that in mind, you could be charged a foreign transaction fee any time you:
For example, say you go to the U.K. for a vacation. The U.K. uses the British pound as its currency. Most of your purchases will be charged to your card in pounds, then converted to USD before it hits your credit card account. If your card charges FX fees, each of those purchases will be charged a fee.
In some cases, merchants may offer to convert the purchase into USD for you right there in the shop. This is a bad idea for two reasons:
Basically, no matter how you slice it, if you make a purchase with your credit card while abroad, you could be on the hook for FX fees.
Many people assume foreign transaction fees only occur when you're traveling internationally. Unfortunately, that's not the case.
The world wide web has made it so that we can shop from stores around the world without ever leaving our homes. But as far as your credit card issuer is concerned, those purchases were still made abroad.
In other words, if you make an online purchase with a foreign merchant, that purchase may be in a foreign currency. Even if you're charged in USD, the transaction will likely still go through a foreign bank. Either way, you can be charged a foriegn transaction fee.
For example, say you're shopping at Etsy.ca, the Canadian division of Etsy. Purchases you make will be processed by Etsy in Canada. That means a Canadian bank will be involved in the transaction. This opens you up to FX fees.
What's more, it doesn't matter which seller you use. You could buy from a U.S.-based seller, make the purchase in USD, and have it shipped to your U.S. address. But if Etsy's Canadian processing system is still involved, then a Canadian bank will be involved. And any involvement from a foreign bank could mean foreign transaction fees.
The rate you're charged for a foreign transaction fee is set by the credit card issuer. Not all credit cards charge FX fees. In fact, the best travel rewards credit cards have no foreign transaction fees at all.
In general, however, the majority of cards will have some sort of FX fee. Most, but not all, issuers charge the same rate for FX fees across all of their cards, and those are typically 0%, 2.7%, or 3%
If your credit card charges a foreign transaction fee, it must list that fee in your credit card's Rates and Fees document. (This may also be called the Pricing and Terms document.) This is where all of your card's interest rates and other fees will be listed.
You were sent a copy of your card's rates and fees when the card was mailed to you. If you don't have your physical copy, you can typically download it from your online credit card account. In some cases, your foreign transaction fee rate may also be listed under the card details section on your account home page.
Most cards list the foreign transaction fee rate in the Fees section under the Transactions subsection. If there is no line for foreign transactions, your card likely does not charge a foreign transaction fee.
The simplest way to avoid foreign transaction fees is to use a credit card that doesn't charge them. The majority of travel rewards credit cards have 0% FX fees.
Another method to avoid FX fees is to use cash to make your purchases. If you're not using your credit card, the issuer can't charge you a fee.
The problem with using cash, however, is that you need to convert your money to another currency at some point. No matter where or when you do this, you're probably going to pay a fee for the service.
For example, say you use a debit card to pull money out of a foreign ATM. Chances are good your debit card will charge a foreign transaction fee for the ATM withdrawal. Using a currency conversion kiosk or merchant will also typically come with some sort of service fee.
Foreign transaction fees are set by the credit card issuer and vary from card to card. The most common rate for a foreign transaction fee is 3%. Most travel rewards cards have 0% foreign transaction fee.
You can find your credit card's foreign transaction fee listed in the Rates and Fees document. It's also sometimes called Pricing and Terms.
You get a copy of this document when the card is shipped to you. If you don't have it, you can find a copy of your card's rates and fees in your online credit card account.
The foreign transaction fee rate will be listed in the Fees section under Transaction Fees. If there is no line for foreign transactions, your card likely does not charge a foreign transaction fee.
The best way to avoid foreign transaction fees is to use a credit card that doesn't charge them at all. Most travel rewards credit cards have 0% foreign transaction fees. Capital One and Discover credit cards don't have foreign transaction fees. Your local credit union may also have no foreign transaction fee credit card options.
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