What Is a Foreign Transaction Fee & How Does It Work?

A foreign transaction fee, also known as an FX fee, is charged by credit card issuers when you use your credit card internationally, or when you make a purchase in foreign currencies. You may also incur a fee when your transaction is routed through a non-US bank. Fees are a percentage of the amount of each foreign currency purchase converted to US dollars, and they typically range from 1% to 3%.

There are two components in a foreign transaction fee:

1. Currency conversion fee: This is the 1% fee charged by the credit card network such as Mastercard or Visa, which is applied to all foreign transactions
2. Credit card issuer fee: This is an additional fee that ranges from 0% to 2% per foreign transaction, depending on the issuer

For example, Let’s say you swipe your travel credit card, or any credit card, to pay for foreign purchases equivalent to $1,000 on the Visa network, Visa charges a 1% conversion fee, while your card issuer charges an additional 2% FX fee. The total foreign transaction fee that appears on your card’s billing statement is 3% of the foreign purchases converted to US dollars, which, in this case, is 3% of $1,000, or $30.

How to Avoid Foreign Transaction Fees and Other Fees

Foreign transaction fees are common especially when you use your credit card when traveling outside of the US. Sometimes, foreign merchants will give you the option to charge your transactions in US dollars instead of their local currency through a process called the dynamic currency conversion (DCC). However, dynamic currency conversion may result in unfavorable exchange rates because the rates are usually set by the merchants.

Choose to Pay With Cash

The easiest way to avoid foreign transaction fees on your credit card is to pay with cash. Create a budget for your travel, estimate how much cash you will need, and exchange currency before you leave the US. Using cash in local currency may be more convenient and less expensive than charging your purchases on your credit card.

It’s important to have enough cash in the local currency and avoid using foreign ATMs. If you withdraw from a foreign ATM, you may run into foreign ATM fees.

Use a No Foreign Transaction Fee Credit Card

While most credit cards charge foreign transaction fees, there are some that don’t. A credit card without a foreign transaction fee will help you save money when making international purchases. These credit cards even absorb the 1% fee charged by the credit card network. There are also no FX fee business credit cards available for people who travel for business.

Choose To Pay In the Local Currency

When a foreign merchant gives you the option to pay either in US dollars or in their local currency, always choose the local currency. If you choose to pay in US dollars, the merchant gets to set the exchange rate to convert the cost of your purchase through the dynamic currency conversion. The merchant’s conversion rate is usually higher than your credit card issuer’s rate, so you will end up paying more.

Where to Find Your Card’s Foreign Transaction Fee

The Truth in Lending Act (TILA) requires all credit card issuers in the US to disclose all fees in their terms and conditions. You can find your credit card’s transaction fees in the specific card’s cardholder agreement. If you have trouble finding information about these fees, you can call your credit card issuer to ask.

Foreign Transaction Fees by Major Credit Card Issuers

Credit card issuers should disclose their transaction fees in their cardholder agreement or their terms and conditions. Foreign transaction fees vary from one issuer to another, and some issuers have different FX fees depending on the type of credit card. If you travel for business purposes, these major credit card issuers also offer business credit cards.

Foreign Transaction Fee vs Foreign ATM Fee

Foreign transaction fees should not be confused with foreign ATM fees. FX fees are associated with using a credit card to make foreign purchases, while foreign ATM fees are fees incurred when you withdraw money from a foreign bank’s ATM. When you use a foreign ATM, it will typically charge you an international ATM fee, FX conversion fee, and an ATM access fee. Foreign ATM fees typically range from $1 to $5 per withdrawal.

Here are some ways you can avoid foreign ATM fees:

• Create a budget before your trip and bring enough cash in local currency with you.
• Open an account with a large bank that has branches and ATMs in foreign countries, which you can use for free.
• Use a debit card from an issuer that is part of a large network which has partner ATMs in other countries.
• Find banks or credit unions that reimburse ATM fees.

Using your credit card and ATM card abroad can incur additional charges. It’s best to be prepared with your budget whenever you travel and have enough on-hand cash in local currency to avoid paying for these fees.

Bottom Line

You may incur foreign transaction fees when you use your credit card for international travel and foreign purchases. To avoid this, it’s best to have enough cash in the local currency whenever you travel. Also, get yourself a credit card with no foreign transaction fee, especially if you frequently travel overseas or make online purchases in foreign currencies.