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Travelers often make the mistake of going overseas without studying the exchange market. You don't have to slave away for hours doing this, but it is important to know what your money would be worth in another country. Foreign transaction fees, exchange rates, and the like can all add up to money out of your pocket. Your budget may not stretch as far as you want it to.
For this article, we are going to assess what foreign transaction fees really can really cost you in comparison to other options. This should help you determine how you want to pay during your travels.
What Are Foreign Transaction Fees?
Foreign transaction fees are added to the cost of a transaction when you use your credit card overseas. These fees may also be charged when you buy an item in another country, since your US dollars have to be converted to their currency. The amount of money you spend on a fee like this will depend on the card you are working with. Some will charge a flat rate per transaction, but most will charge a percentage of the total, according to Bank of America's "Facts about Fees." Other cards, like some of those offered by Capital one, don't charge foreign transaction fees.
If you notice foreign transaction fees on your account without making any foreign purchases, you may want to contact your credit card provider about identity theft. This could be a clear indication of suspicious activity. If you are buying items or paying for services in another country though, you'll see these for every transaction.
How Are Foreign Transaction Fees Calculated?
Foreign transaction fees are typically a combination of costs from both the credit card company and the bank it is issued through. For instance, let's assume that you have a Bank of America MasterCard that you want to use as you travel. You may have a 2% fee from Bank of America and then a 1% fee from MasterCard. This will vary by card, bank, and year, but there is usually some kind of combination to keep in mind.
Some credit card providers will absorb the foreign transaction fees, namely Capital One and Chase. These issuers only require you to pay an exchange rate, just like you would with cash or checks. With most other credit card companies, expect to pay 1-3% for a foreign transaction fee, on top of the exchange rate. You should also note the flat fees that other payment processors may charge, like an airport or a foreign bank.
How Do Foreign Transaction Fees Compare to Other Conversions?
According to a recent currency exchange study, "credit cards save consumers 8.1% relative to bank conversion services and 16.2% relative to companies found in airports." In other words, it is usually cheaper to pay with a credit card than it is to exchange your money out of the country. Of course, this will depend on the credit card you use and the charges within your bank, but the majority of people get the best deal when they shop through credit cards.
The chart below highlights how much 20 Euros will cost you through various payment options. The blue indicates the money you will pay as a result of the exchange rate, and the green indicates the additional fees you will pay.
Caption: Numbers courtesy of the Currency Exchange Study.
As you can see, Visa came in as the cheapest payment option, whereas airport conversions came in as the most expensive. Some options had low exchange rates, but then they tacked on high transaction fees. You have to keep all of this in mind when you start making purchases overseas, as it will impact your overall costs.
Of course, the differences in these rates become more substantial as you pay more money. With a Visa card, spending 2,000€ would cost you $2,516.40. With an airport transfer, the same money would cost $2,908.55. That's almost a $400 difference! Seeing that the average traveler spends roughly $4,000 on a trip overseas (U.S. Travel Association), finding an affordable payment option is more important now than ever.
To put matters into perspective, let's take a look at how exchange rates alone will impact your currency conversions:
With this chart, Visa and MasterCard seem like the most affordable options, and they are in the long run. However, Chase is in the middle of the pack, when really it is one of the cheapest cards to carry overall. The same goes for Capital One, which is the third most expensive option on this chart. In all actuality, it is one of the best card types for foreign travels. Before you focus on exchange rates alone, you need to think about foreign transaction fees. They could make or break your budget in the end.
Some credit cards will offer rewards for foreign purchases as a way to offset the transaction fees. At the very least, you can find airline rewards cards to help you minimize your costs while traveling. In addition to those options, you may seek out no foreign transaction fee cards, like the ones from Capital One mentioned above. Many card providers are starting to offer this kind of opportunity because travelers usually have a lot of money to spend. By reducing or eliminating their fees, the card companies can entice them to use their cards regularly.
You also need to be aware of dynamic currency conversion, which seems like a convenient way to convert your money overseas. With this process, a merchant will offer to exchange your currency in his store, rather than having you go somewhere else. The problem is that the merchant will usually charge significantly more than the going exchange rate to provide this service. Keep up with pure credit card payments, and you'll be able to save the most money possible.
Foreign transaction fees make a bigger difference than you may realize, which is why you always have to understand your fees before choosing a credit card. It's not always about the rewards or the low introductory APR. It's about how well your card can work for you. Find a card with low foreign transaction fees before you head overseas, and you'll be able to enjoy your trip with money to spare.
*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.