Foreign transaction fees are becoming easier to avoid. If you travel in mind, here’s how they work, which cards charge them and which don’t
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You just got back from a pricey trip abroad and while reviewing your credit card statement, you noticed the expected airfare, lodging and food charges, but also “foreign transaction fee” charges. What’s that all about?
A foreign transaction fee is a charge, usually 3 percent, that many credit card issuers and payment networks add for each transaction made abroad. Like baggage and passports, foreign transaction fees have been a standard part of international travel for years. However, more cards are doing away with this fee each year, according to CreditCards.com research.
That’s good news for travelers who have a fee-free card. However, if you have cards that still charge a foreign transaction fee – or are just unfamiliar with the fee overall – here are the ins and outs of this particular fee and advice on avoiding extra charges when traveling abroad.
What are foreign transaction fees?
Credit card holders are typically charged foreign transaction fees when they purchase items while overseas or when they make purchases that use an overseas bank to process the transaction.
Why? “Because banks have to convert your money spent into U.S. dollars so they can charge your account,” said Victoria L. Fillet, a financial adviser with Blueprint Financial Planning in Hoboken, New Jersey. That conversion costs money, and some card-issuing banks pass that cost along to consumers in the form of foreign transaction fees.
According to Nessa Feddis, vice president and senior counsel for the American Bankers Association, foreign transaction fees also help banks offset the greater fraud risks associated with international transactions. “There are risks and costs associated with any money conversion,” she said.
Does my card charge foreign transaction fees?
- Not sure if your credit card will charge you a fee for foreign purchases? Check the card’s terms and conditions.
- It used to be much harder to find out. For years, the charges were not disclosed, until class-action lawsuits forced a change.
- In 2006, Visa, Mastercard and Diners Club and their card-issuing banks agreed to a $336 million settlement for hiding foreign transaction fees.
- As part of the agreement, 10 million consumers got refunds and the banks agreed to disclose the fees.
Foreign transaction fees vary between issuers and cards, but most foreign transaction fees are about 1 to 3 percent of each qualifying transaction. The overall fee is often comprised of two fees: One from the payment networks and one from the card’s issuing bank.
Visa and Mastercard, which handle the transactions between foreign merchants or banks and U.S. card issuing banks, typically charge a 1 percent fee for each foreign transaction. Then, card-issuing banks may tack on their own charges, usually an additional 1 or 2 percent, leaving total foreign transaction fees at 2 or 3 percent, depending on the card and co-branded payment network.
American Express doesn’t use the Visa or Mastercard payment system, but on its foreign transaction fee-charging cards, the network typically tacks on its own foreign transaction fee of 2.7 percent.
(See chart below to compare credit card issuers’ foreign transaction fees.)
Credit card travel fees are fading away
Good news: Increasingly, consumers – especially wealthy cardholders and frequent fliers – are seeing foreign transaction fee-free card offers.
Some issuers, such as Pentagon Federal Credit Union, Capital One, USAA and Discover, have eliminated foreign transaction fees from all their credit cards.
Video: Traveling overseas
Other issuers haven’t done away with foreign transaction fees entirely, but deleted them from specific cards, a trend CreditCards.com has observed for several years now. Starting around 2010, more banks began courting well-heeled travelers with credit cards that don’t carry this particular fee.
A 2015 CreditCards.com survey of 100 U.S credit cards found while most consumer cards charged foreign transaction fees, 23 cards didn’t. In 2016, the same survey found 39 of 100 cards were foreign transaction fee-free. You can compare cards with no foreign transaction fee on this site.
This trend of disappearing foreign transaction fees is expected to continue, according to industry experts, which is good news for consumers.
“It’s called ‘competition,’” ABA’s Feddis said. “Cards without foreign transaction fees are widely available in a highly competitive market as banks fight to attract and keep customers. For people who don’t travel abroad it may not be important, but there are many for whom it might be very important. So you will see banks respond. It’s the customers who drive the credit card features and terms.”
What about foreign ATM fees?
Many banks still charge foreign transaction fees for withdrawing cash at foreign ATMs, even if foreign credit card purchase transactions can occur fee-free. Some banks waive certain fees if you withdraw money from partner bank ATMs. For example, Bank of America generally charges 3 percent fee to withdraw cash from a foreign ATM. However, if you use an ATM at one of the company’s Global Alliance Partners, which includes Barclays, Deutsche Bank and China Construction Bank, the $5 fee is waived, according to the Bank of America website.
Overall, ATM foreign transaction fees can vary depending on the issuing, the card and how you use it. Travelers who withdraw cash from ATMs in the local currency may incur several fees:
- A flat-rate international ATM surcharge charged by your bank when using an ATM not affiliated with your bank, usually $5, but it may vary.
- A foreign currency conversion fee charged by your bank, typically a percentage of the withdrawal amount, usually 3 percent.
- An additional ATM access fee charged by the owner of the foreign ATM you are using.
“It’s different if you have a bank that has international branches or if you have a level of deposit where they don’t charge fees,” Fillet said. “But I think it’s difficult to avoid ATM fees in a foreign country overall.”
As a result, it’s probably best to avoid using case and pay with a credit card – especially if it’s fee-free – instead. “You don’t have to use cash for a lot of things anymore either, depending on where you are going,” Feddis added. “It’s easy enough to pay with plastic and not have to withdrawal cash at all.”
|FOREIGN TRANSACTION FEES: WHICH CARDS HAVE THEM|
|Issuer||Issuer fee||MC/Visa fee||Total fee||Foreign ATM fee|
|American Express||2.7%||N/A||2.7%||2.7% foreign currency withdrawal fee on some accounts|
|Bank of America||2%||1%||3%||$5 usage fee for each non- Global ATM Alliance partner, plus 3% currency conversion fee for each withdrawal, regardless of ATM type|
|Barclaycard||2%||1%||3%||3% currency conversion fee|
|Capital One||None||1%, but not passed on to cardholders||None||3% currency conversion fee for some accounts|
|Chase||2%||1%||3%||$5 per withdrawal, plus 3% currency conversion fee. Fees waived on some accounts|
|Citi||2%||1%||3%||3% currency conversion fee for some accounts|
|HSBC||None||None||None||3% currency conversion fee for some accounts|
|Pentagon Federal Credit Union||None||1%, but not passed on to cardholders||None||None|
|U.S. Bank||Not disclosed||Not disclosed||2% of each foreign purchase in U.S. dollars, 3% of each foreign purchase in a foreign currency||2% of each foreign ATM advance in U.S. dollars, 3% of each foreign ATM advance in a foreign currency|
|Wells Fargo||2%||1%||3%||$10 or 5% of each transaction, whichever is greater|
|Source: CreditCards.com research December 2016|
Note: Issuer credit card foreign transaction fees are subject to change and likely vary by card. Please see your card terms for the most accurate and current foreign transaction fee information.
How to avoid extra travel costs
Frequent travelers probably know they can get slammed by foreign transaction fees if they use credit and debit cards abroad. However, since it’s now easier to avoid these charges, if you’re about to travel abroad, take action before the wheels go up on your foreign flight:
- Know your card terms. If you can’t readily find information about foreign transaction fees, pick up the phone and call the number on the back of your card. The information should be disclosed in your card agreements – a change from the past, when the first time a card user might find out about the fee was when it came in the bill after a trip.
- Research your overseas bank network. Check to see if your bank is part of a global ATM network that you can use to access cash overseas for free – or at least at a lower cost.
- Apply for a fee-free card. If you travel frequently, it may make sense to apply for a credit card that does not charge foreign transaction fees.
- Use only credit abroad. Do not use a debit card in a foreign country, says Fillet. Not only can you avoid paying fees if you rely on a foreign transaction fee-free credit card, but you’ll be protected if something goes wrong with a foreign transaction, Fillet explained. “Say you ordered something in a foreign country, paid for it, but it was never delivered,” she said. “If you have a reputable credit card, they will back you up and fight for you to either get the credit back or the product.”
- Always pay in the local currency. Sometimes, foreign merchants will offer to convert your purchase to U.S. dollars before you pay with your card. Both Feddis and Fillet advise to politely decline this offer because it may result in dynamic currency conversion costs that you’ll have to shoulder. Instead, let your card’s bank and network convert the currency to U.S. dollars and charge you the set foreign transaction fee – if there even is one. If so, it’ll likely be more affordable.