Everything You Need to Know about Foreign Transaction Fee: Definition, How They Work, and Examples

Everything You Need to Know about Foreign Transaction Fee

Many of those who are keen on traveling around the world encounter foreign transaction fees regularly. To make a purchase overseas, all US cardholders have to face approximately 3% charges.

Those figures are usually hidden deep in the details of your credit card’ terms and conditions. You may be wondering, are there any credit cards that don’t require extra charges?

Perhaps, there is a debit or credit card that won’t incur a foreign transaction fee? In this article, we’ll help you avoid such charges and save some money during your international trips.

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Best Travel Credit Cards with No Foreign Transaction Fee

What Is a Foreign Transaction Fee Credit?

A foreign transaction fee is an extra charge you have to pay additionally to every purchase you make beyond the United States. The figures range from 1% to 5% of the overall value. Usually, those are charged by the card issuers or your home bank and shown up as a separate payment in your payroll.

Such providers as Mastercard, Discover, and American Express also incur currency conversion fees. Typically, it’s only 1% and applies to any payment regardless of the credit card type and one’s credit score. Banks like Chase, Citibank, and Barclays may charge around 2% or add some figures on top for their services. Yet, other parties may absorb and let you avoid these fees.

Understanding Foreign Transaction Online and ATM Fees

Foreign transaction fees are charged by banks and credit card companies when you make a purchase online or use an ATM in a foreign country. These charges were intended to cover the additional fees imposed by merchants and financial institutions involved in processing foreign transactions.

In addition to these charges, you may also be subject to an exchange rate fee, which can add up to a significant amount of money over time. It’s important to understand these rates before traveling abroad or making purchases from foreign websites to avoid surprises on your statement.

Before traveling, it’s a good idea to contact your bank and credit card company to learn more about their foreign transaction fees and exchange rates. And, if you plan on using an ATM or making purchases while abroad, it’s wise to carry cash or use a travel card to avoid two fees altogether.

Understanding how foreign transaction rates work will help you make the right credit decisions and ensure that you’re not overpaying for your purchases abroad.

Is It the Same as a Currency Conversion Fee?

When dealing with credit cards, it’s critical to be aware of and differentiate between conversion and transaction fees. Transaction charges are imposed by the credit card issuer based on purchases and withdrawals that are made overseas or from a foreign website.

Generally, these fees can range from one to three percent of the transaction amount.

The good news is that plenty of credit cards come with zero rates, making it possible to avoid the charges altogether.

A conversion fee is applied when a purchase is made in a foreign currency and needs to be converted into the buyer’s local currency. You may withdraw cash from an ATM abroad or just pay with your card at a coffee shop. The fee is collected by the payment processor and is typically around one percent of the total sum.

The exchange percentage used for this conversion may not be as favorable as the actual exchange rate, resulting in higher conversion rates. Overall, it’s crucial to consider the potential fee when making purchases in foreign currencies.

How Much Are Foreign Transaction Fees?

Foreign transaction fees vary depending on the bank and the type of transaction. When using foreign ATMs, for example, there is commonly a contribution charged by both the foreign bank and your own bank.

The foreign transaction fee is typically a percentage of the transaction amount rather than a flat figure. This can vary from bank to bank but is usually up to 3% or 5% of the chosen amount. Some financial institutions may also charge a currency conversion fee, which adds an additional cost to the transaction.

Bank of America, for example, charges a 3% foreign fee and also charges a $5 out-of-network ATM fees for using non-Bank of America ATMs overseas.

It’s important to check the terms and conditions to know before traveling abroad to understand their policies regarding foreign purchases and any extra fees that may apply.

Choosing a bank that offers lower fees or waives charges for shopping abroad altogether can help save money while traveling internationally.

Read Also: Best No Foreign Transaction Fee Credit Cards

Credit Card Foreign Transaction Fee Chart

If you’re planning on using your credit card while traveling around the world, it’s important to be aware of the transaction rates that may be assessed by your credit card company.

These fees can really add up and impact the total cost of your trip. It’s a good idea to review the terms of your credit card or see a foreign transaction fee listed in the agreement to compare fees from different issuers.

Some issuers offer cards with little to no transaction fees, such as Capital One, American Express, Chase, US Banks, Barclays, Citibank, etc.

Depending on your travel habits and preferences, it may be worth considering one of the best travel credit cards that offer these features.

Doing a little research beforehand can save you money and make your trip planning more transparent.

Additionally, to ease your research, we’ve found the most suitable cards for travelers from each issuer. Below, in the chart, you can see famous American financial institutions, their rates, and cards that offer zero percent fees on purchases abroad.

Card Provider Transaction Rates Credit Cards With No FX Fees
Bank of America 3% Alaska Airlines

Travel Rewards

Premium Rewards

Capital One 0% All the Cards
American Express 2.7% Delta SkyMiles Platinum / Reserve

Hilton Honors Aspire / Surpass

Marriot Bonvoy Brilliant

Chase 3% World of Hyatt

United Explorer / Club Infinity

Southwest Rapid Rewards Premier

US Bank Up to 3% US Bank Altitude Go Signature

US Bank Altitude Connect Signature

US Bank Altitude Reserve

Barclays 3% JetBlue Business

Hawaiian Airlines

Aadvantage Aviator Red World Elite

Citibank 3% Costco Anywhere

Citi Platinum Select World Elite

Citi Premier

How a Currency Conversion Fee Can Really Work

For every purchase abroad paid in USD, your financial provider will charge a fee of approximately 3%. Commonly, MasterCard processor services require 1% of the transaction amount. However, customers have to cover 2% more than are charged by credit card providers like Wells Fargo or Capital One.

Although 3% seems like nothing, these figures can greatly impact your expenses during the extended journey. For example, for every $1000 you spend, you will be charged a foreign transaction fee of an extra $30.

Yet, always consider getting a credit card with no foreign rates. This way, you’ll avoid overpaying and fully enjoy your vacation without financial worries. Even if your credit card is lost, you can quickly return the funds with the help of your credit union or bank.

The majority of foreign marketers will also offer an option of paying in your home currency, which is called dynamic currency conversion (DCC). Yet, it may not be as favorable and cost-effective to pay in USD, as the DCC rates are higher than average figures. Therefore, it’s reasonable to get acquainted with the details of your agreement and the credit card’s terms and conditions.

How To Calculate Foreign Transaction Fees

Using your credit card while traveling requires lots of calculations. Considering that all customers of the US banks have to pay an extra 3% for every purchase, the overall cost of the vacation turns out to be double the expected price. So make sure you know about foreign transaction fees and how to calculate the expenses correctly.

Let’s imagine that you’ve decided to visit Italy and rent an apartment with a total cost of $93. You paid with your Visa card, which imposes a 2% issuing bank commission. After the conversion, the sum equals $100. According to such figures, Visa will charge an extra 1% for your accommodations and then 2% on top.

Overall, the cost of your apartment would be $100 + ((1% + 2%) x 100) = $103. Although the additional charges don’t seem that significant, paying an extra 3% for every item will quickly shorten your allowances.

Why Do We Pay Foreign Transaction Fees?

International transaction fees are a significant part of the payment process. By charging an extra percent, the conversion processor earns money that will be distributed among different departments.

For instance, these fees cover expenses for equipment and software supplies, employees’ wages, etc. Such a scheme supports a well-thought-out system that has been working for many years.

Although customers resent such currency transaction fees, they help the processor remain in business and continue its services. So, just like you pay for any of your accommodations, you need to purchase transaction fees to help the processor maintain payment facilitation.

Situations When Customers Are Charged a Foreign Transaction Fee

Any purchase made at a cafe shop, shopping center, or other markets outside the US would be subject to foreign transaction charges if your card has such a feature.

Many vendors will offer travelers to pay in their local currency, as it helps to avoid high conversion fees. Furthermore, having a local card charge the fee only for transactions is a smart idea.

Another subject to foreign transaction charges is cash withdrawals at ATMs abroad. The conversion rates will be tacked on automatically. There is no way to avoid such fees but to bring your own cash or pay with a card.

Finally, online shopping at foreign websites will cost you extras as well. For example, buying international airline tickets would be considered a foreign transaction even if you paid in USD.

How To Use a Credit Card to Avoid Foreign Transaction Fees

No doubt that having a card with no foreign transaction charges would be nice. Luckily, there are several ways you can purchase in another country with zero exchange fees.

Lots of financial institutions offer checking accounts with no extra figures for shopping abroad and online from a foreign website. Applying for a new card could be an option, but it would take up to two weeks, if not more. So, before rushing, consider the following tips.

Get a Credit Card That Doesn’t Charge Foreign Transaction Fees

Many financial providers offer credit cards that don’t charge foreign transaction fees. This option is the easiest way to avoid overpaying. Moreover, it’s safe and convenient both for purchasing abroad and online shopping on a foreign site.

The majority of banks also reward customers with bonuses that can be used for future journeys or indemnify the cost of some purchases. The biggest advantage of using a credit card abroad is efficient security measures. In case your card is lost or stolen, you can quickly report fraud and receive the laundered sum back from a financial provider.

Exchange Your Money Before Leaving

Another way to swipe without incurring foreign ATM and transaction charges is by bringing cash on a vacation. This idea is suitable if you’ve done accurate calculations and know the precise amount you’ll spend on souvenirs, food, and other items. American travelers can apply to credit unions, banks, or currency exchange bureaus to get the needed value, like EUR or so.

Although this option lets you avoid the fees, carrying lots of cash around can be dangerous. You have to be highly attentive, keep an eye on your purse and always prepare a backup plan, so you won’t find yourself with no funds for food or other necessities.

Open a Bank Account with No Foreign Transaction Fees

Finally, you can get a bank account that doesn’t charge fees or similarly open a new card. It’s a great way to save up on fees while traveling. Moreover, by using a debit card, you can withdraw cash from an ATM with zero charges, which is suitable for frequent voyagers who prefer to pay in cash.

However, even if a debit card doesn’t charge commissions, it’s more vulnerable to fraud and laundering. If your information gets stolen, it could take months to receive the funds back from a financial institution. Therefore, always report laundering or fraud immediately to get your money back as soon as possible.

Sources Used in Research for the Article:

  1. International ATM fees, Capital One, https://www.capitalone.com/help-center/checking-savings/international-atm-fees/
  2. Tips for International Travel, Bank of America, https://resources.bankofamerica.com/direct/render-resource/652b1758b1204e679972c572580864a0
  3. Do I have to pay foreign transaction fees when I use my Card, American Express, https://www.americanexpress.com/us/customer-service/faq.foreign-transaction-fees.html

FAQ

What Is a Foreign Transaction Fee?

A transaction fee is a charge assessed by financial institutions like card issuers or banks. Customers have to cover these expenses to pay the foreign merchant services. Although many object to an extra 3%, such charges maintain the financial circle. Funds received from fees are distributed for employees' salaries, equipment, etc. 

Which Cards Have No Foreign Transaction Fees?

There is a wide range of financial institutions which offer fee-free cards. A customer can choose among famous American banks like Citibanks, Barclays, or American Express and then select a credit card to buy. AAdvantage Aviator Red World Elite Mastercard, Southwest Rapid Rewards Premier Credit Card, and many more are available for travelers. 

When Are Foreign Transaction Fees Charged?

Once you make a transaction that goes through a foreign bank, your financial network will flag this process as “foreign” spending. The same applies to online purchases on the site of other countries. Using money at your home bank in USD won’t help avoid fees, as the transaction is already routed through a foreign institution. 

How Much Are Foreign Transaction Fees?

There is no certain amount one is supposed to pay. The figures depend on the transaction you make and the card you hold. Commonly, customers have to pay 1% for conversion and 2%-3% for a transaction. Therefore, the average fee is around 3%, which can add up if you purchase a lot during your vacation. 

Do Debit Cards Have High Foreign Transaction Fees?

Although many customers think that this option requires high fees, it’s not true. There are lots of options that you can choose from, as many of these cards do not charge foreign transaction rates. Moreover, having a debit card that doesn’t charge extras is a great alternative to avoid fees for using your card overseas.