When traveling abroad, you may decide to pay for purchases with your credit card. This is certainly a convenient way to handle foreign transactions. Major cards, such as Visa and MasterCard, are accepted around the world. And when you use a credit card in a foreign country, your card company automatically converts the purchase to U.S. currency and this dollar amount appears on your credit card statement. However, the unsuspecting traveler may pay currency exchange fees for credit cards anyway.
Basics of Foreign Transaction Fees
Foreign transactions fees aren’t the most appealing aspect of using your credit card overseas, with fees ranging from 1% to 3% of a transaction price. But unless you apply and get approved for a credit card that features no foreign transaction fee, this is the price you pay for convenience.
Looking at the big picture, foreign transaction fees or currency conversion fees are minor inconveniences. For example, if your credit card company only charges a 1% conversion fee, that is only $10 per every $1,000 that you spend. Of course, you can avoid this fee by bringing cash. But then there is the inconvenience of exchanging your currency or searching for an ATM in unfamiliar territory.
Hidden Currency Exchange Fees
If choosing to pay for foreign transactions with your credit card, let your credit card company do the currency conversion. If you’re shopping or dining at an overseas establishment, an overseas merchant may offer to convert your transaction from the local currency into U.S. dollars. On the surface, this may appear like a nice gesture, and perhaps a way to avoid your credit card company’s foreign transaction fee. In fact, some merchants may market this offer as a cheaper alternative and a way to avoid fees imposed by your credit card company. But regardless of how honest or trustworthy a merchant appears or how enticing the offer sounds, think twice before allowing a merchant to convert your credit card transaction into U.S. dollars.
Called dynamic currency conversion, this is how some overseas merchants take advantage of tourists. In all likelihood, the merchant will charge a conversion rate that is much higher than the standard conversion rate. And to make matters worse, a dynamic currency conversion does not replace the foreign transaction fee. Credit card companies charge this 1% to 3% on every foreign transaction, regardless of whether they convert the currency. If an overseas merchant charges a 6% conversion rate, and your credit card company charges a 3% foreign transaction fee, you could end up paying an extra 9% on your purchase.
If you do accept an overseas merchant’s offer to convert your credit card transaction into U.S. dollars, make sure that you’re familiar with the standard conversion rate. Otherwise, you may find you’ve pay too much in currency exchange fees for credit cards. To be on the safe side, download a currency conversion app directly to your smartphone before traveling abroad. You can double check the merchant’s math before handing over your credit card and decline their offer to convert your transaction if you feel that the final price is incorrect.