What Is a Foreign Transaction Fee & How to Avoid Them?

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A lot of things can trigger the post-vacation blues: a groaning inbox; sand in all your clothes; your busted phone destroyed your photos. But the worst surprise is lurking in your credit card bill. Not only did you drop $187 for one night out, but your bank is charging you an extra $5.61 because it was in Aruba rather than Seattle. And they’re tacking a similar fee on the rest of your transactions, up to 3%, onto every dollar you spent abroad.

Traveling abroad is already an expensive adventure, but with foreign transaction fees tacked onto every little purchase, those pesky charges can quickly add up. But what is a foreign transaction, how much are they, and how can you avoid them during your overseas journeys? Read on to find the answers to your burning questions.

What is a foreign transaction fee?

A foreign transaction fee is a charge your credit card issuer imposes anytime you make a transaction with your card in a foreign currency or through a foreign financial institution. In processing these international transactions, your card issuer levies an extra fee at a certain percentage of the amount of your total transaction. This percentage usually falls somewhere between 1% and 3%. You will generally find this charge listed on your card statement as its own fee.

Visa and Mastercard typically charge 1% on international transactions whereas American Express imposes its own foreign transaction fee of 2.7%. Additionally, banks typically add their own fee on top of the fee your card issuer imposes. JP Morgan Chase, for example, charges an additional 2% to international purchases which can hike your total foreign transaction fee to 3% or more.

What types of purchases incur a foreign transaction fee?

What exactly constitutes a foreign transaction? The answer might be a little trickier than you think. Just a couple decades ago, foreign transactions were clearly characterized as purchases or transfers completed on foreign soil. However, in more recent years, credit card networks started tacking on fees to any type of transaction that passes through a foreign bank. This even includes purchases completed online.

Common types of purchases that will incur a foreign transaction fee include:

  • Buying flight tickets in US dollars, through a US website, from an international airline
  • Shopping online, when a foreign bank is somehow involved in the transaction in a way that is completely opaque to the customer
  • Using international ATMs to withdraw cash

Can you opt out of foreign transaction fees?

You don’t have to dispute a fee if you’re not charged one in the first place. There are a number of foreign-friendly banks that allow you to forgo the headache of foreign transaction fees and encourage you to make most purchases in the countries of your choice without requiring you to pay any hidden fees. 

Let’s take a dive into the best banks that allow you to opt out of foreign exchange fees. 

The most well-known is Capital One, which charges no international fees (not even the 1% Visa/Mastercard fee) on any of its credit or debit cards. Capital One’s cards require a high FICO score to qualify, and they have a reputation for being real sticklers about fraud: if you don’t call in advance to tell them where you’re traveling (this is a good idea in any case), your card will be declined once you arrive at your overseas destination.

For debit card fans, the traveler’s best friend is the High Yield Investor Checking account at Charles Schwab. You will have to also hold a brokerage account with Schwab, but neither the brokerage nor the checking account has a minimum balance requirement or maintenance fees. The debit card has no ATM fees and no international fees anywhere in the world, and the account even pays a small amount of interest.

Finally, there are many credit unions across the nation that offer credit and debit cards that are foreign transaction fee-free. Many credit unions and community banks simply pass on the 1% Visa/MC charge but don’t add on their own fees. A few waive the charge completely. Check out your local credit unions to see what options are available in our area.

How to avoid foreign transaction fees

1. Get a fee-free credit card

If you hate paying foreign transaction fees, you might want to find a credit card that doesn’t charge you for making purchases overseas. Many major credit card issuers offer these kinds of cards, including Chase, Capital One, and Discover.

Credit cards that eliminate any international transaction fees will save you money even when you’re taking a break from your overseas globetrotting. No need to worry about online shopping purchases costing you extra. You can easily escape being charged a foreign transaction fee while shopping domestically even if the merchant who processes your transaction is based in a different country.

2. Open a bank account with a foreign transaction fee-free institution

You can get slapped with a foreign transaction charge if you use your debit card outside of your native country.  These small but frustrating fees can rapidly add up; if you fly overseas on a regular basis, you’ll find yourself dealing with more headache than you’d like. To avoid constantly incurring these charges, consider opening a bank account with a financial institution that doesn’t penalize you for making transactions or withdrawing cash overseas. 

Capital One 360 is a traveler’s favorite as it does not charge its fees when they use foreign ATMs. The same can be said about Discover Bank. Neither bank imposes a currency conversion fee which means you can travel and spend without any conversion hassle tripping you up along the way.

3. Exchange currency before traveling

Another alternative way to avoid paying international exchange fees is to switch currencies before you jet outside of the United States. If you’re able to plan ahead and calculate any expected costs you’ll encounter, getting the currency you need can be made simple when you simply exchange the currency on home soil.

Your bank or credit union may be able to sell you foreign currency without requiring you to pay additional or hefty exchange fees. This method is by far one of the cheapest and easiest ways to get access to international currency and a fair exchange rate. If you’re planning on using a prepaid debit card or attempting to swap money somewhere (at the airport, at an exchange center, or your hotel), you might end up paying higher overall costs.

4. Avoid using foreign ATMs

If your bank or credit union levies a surcharge any time you use an out-of-network ATM, you know precisely how quickly those extra charges can add up. When traveling outside of the country, the same problem arises, however with foreign exchange fees tacked on, typically results in even higher final fees.

If you absolutely need to withdraw money from a foreign ATM, it’s always best to withdraw all of the cash you will need in the foreseeable future so you don’t have to make multiple costly trips to ATMs. Check if your bank has a foreign bank partner or ATM partner overseas to know which ATMs you can use abroad. 

6. Avoid the Dynamic Currency Conversion

Often when you fly overseas, merchants at shops and kiosks might offer the option to charge for your transaction in USD instead of the local currency. This procedure is called Dynamic Currency Conversion (DCC). 

The DCC typically leads to an unfavorable exchange rate.  Once a merchant accepts your payment using DCC, they will be able to set their own currency exchange rate, which oftentimes leads to higher rates to increase their profits. In the event that you choose to go through with the transaction using local currency, the conversion will be automatically processed by your credit card network. Check their posted exchange rate and compare it to the average rate using a quick Google search.

Keeping it in perspective

Keep a couple of things in mind when making foreign purchases and transfers:

  • Foreign transaction fees are better than exchange counter fees: If you change money at a bank, airport counter, or merchant, you’ll generally get a lousy exchange rate that is even worse than the 3% you’ll pay on a credit card transaction. And if a merchant ever offers to ring up a charge in US dollars, forget it: you’re getting a terrible exchange rate and may even pay the international fee anyway.
  • Don’t forget rewards: If you have a card that offers 1% in rewards and charges 1% in international fees, you’re kind of breaking even: there’s no need to run out and get a travel card with no rewards and no fee.

Foreign transaction fees can be annoying to deal with, but if you’re strategic and plan ahead, you can minimize or entirely eliminate those pesky fees altogether. 

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