Are you tired of being charged extra fees every time you make a purchase in a foreign country? We all know how frustrating it can be to see those additional charges on our credit card statements. But fear not! In this article, we will uncover the secrets of foreign transaction fees and how you can avoid them. So grab a cup of coffee and get ready to learn how to save some money on your next trip!
How do foreign transaction fees work?
Before we dive into the ways to avoid foreign transaction fees, let’s understand how they work. When you use your credit card to make a purchase in a currency other than dollars, there are fees associated with converting the currency. These fees are known as foreign transaction fees.
Foreign transaction fees can be incurred in two main situations:
- When you make purchases in a foreign currency.
- When your transaction involves a foreign bank.
Whenever one currency is converted into another, there are costs involved. Credit card companies usually charge a flat fee, known as a foreign transaction fee, to simplify the process and avoid complications that come from converting different foreign currencies with different agencies and institutions.
What does a foreign transaction fee consist of?
The foreign transaction fee you see on your credit card statement is usually presented as a single percentage, typically around 3%. However, this percentage is made up of two separate fees: the currency conversion fee and the issuer fee.
The currency conversion fee, also known as the network fee, is charged by the credit card company itself for facilitating the currency conversion. It is usually around 1%. The issuer fee, on the other hand, is charged by your credit card issuer and is typically around 2%. These two fees combine to make up the total foreign transaction fee you see on your statement.
How much are foreign transaction fees?
Foreign transaction fees are common and apply to most credit cards. The fee is usually around 3% of the total purchase amount. However, there are some credit card companies that do not charge foreign transaction fees. For example, Capital One does not charge foreign transaction fees for any of its cards, whether they are issued by Mastercard or Visa. So it’s worth considering these options before your next trip abroad.
Foreign transaction fee vs. currency conversion fee: What’s the difference?
It’s important to understand the difference between a foreign transaction fee and a currency conversion fee. The currency conversion fee is the charge imposed by an agent or merchant when converting funds from one currency to another. When your credit card completes the conversion, it is considered the network fee portion of your foreign transaction fee.
However, there is another type of currency conversion called “dynamic currency conversion (DCC).” This occurs when a conversion takes place at the point of sale with a merchant. It’s best to avoid DCC because the fee charged by individual merchants for this type of conversion can be higher than the credit card conversion fee. By refusing DCC, you can save money and avoid paying unnecessary fees.
How to calculate the final cost of your purchase with a foreign transaction fee
When making a foreign purchase, it’s important to consider the foreign transaction fee and the currency conversion rate to calculate the final cost. Let’s take an example:
Imagine you make a credit card purchase in London for £100. Here’s how you calculate the total amount due after factoring in the foreign transaction fee:
- Convert British pounds into U.S. dollars: At the current exchange rate (£1 equals $1.27), £100 equals $127.
- Compute the foreign transaction fee: Multiply the dollar amount of the purchase ($127) by 3% (the foreign transaction fee). This results in $3.81.
Adding the foreign exchange rate and the foreign transaction fee together, the total amount due for the purchase would be $130.81.
3 tips to avoid foreign transaction fees
Now that you understand how foreign transaction fees work, let’s explore some practical tips to help you avoid them:
1. Get a no-foreign-transaction-fee credit card
Many credit cards charge foreign transaction fees, but there are exceptions. Several major credit card issuers offer cards that eliminate these fees. If you are a frequent traveler, consider getting a travel credit card like Amex Gold, which not only avoids foreign transaction fees but also provides other travel-related benefits.
2. Use a debit/checking account with no foreign transaction fees
If you can’t qualify for a credit card without foreign transaction fees, consider using a debit card or checking account that doesn’t charge these fees. Banking apps like Chime and GoHenry offer debit cards with no foreign transaction fees, making them convenient alternatives to credit cards.
3. Pay in the local currency
One simple way to avoid foreign transaction fees entirely is to pay for your purchases in the local currency. By using the local currency instead of your U.S. credit card or dollars, you can bypass the foreign transaction fee. Just keep in mind that you will need to convert your dollars into the local currency, which may involve paying an exchange rate fee.
Remember, it’s always a good idea to check with your bank or credit card issuer to understand their specific policies on foreign transaction fees and currency conversion rates.
Time Stamp: Avoid foreign transaction fees with a credit card that doesn’t charge them
To avoid foreign transaction fees, the best option is to acquire a credit card that doesn’t charge them. While paying in the local currency can be an alternative, it may come with its own drawbacks. Ultimately, the choice depends on your specific situation and preferences.
We hope these tips will help you save some money on your next trip abroad. Happy travels!