What counts as a foreign transaction?
If you have a credit card from a U.S. bank, all of your dealings with that bank will be in USD. Any other currency is considered a foreign currency. Any bank outside the U.S. is considered a foreign bank.
With that in mind, you could be charged a foreign transaction fee any time you:
- Make a purchase in a foreign currency
- Make a purchase in USD that routes through a foreign bank
For example, say you go to the U.K. for a vacation. The U.K. uses the British pound as its currency. Most of your purchases will be charged to your card in pounds, then converted to USD before it hits your credit card account. If your card charges FX fees, each of those purchases will be charged a fee.
In some cases, merchants may offer to convert the purchase into USD for you right there in the shop. This is a bad idea for two reasons:
- It won't stop you from being charged an FX fee. The charge will still go through the merchant's bank, which will count as a foreign bank transaction. As such, you can still be charged a foreign transaction fee.
- Merchants tend to use what's known as dynamic currency conversion (DCC). The conversion rate on a DCC transaction is usually much worse than the standard conversion rate. You'll often get a much better conversion rate by letting your credit card network convert the currency for you.
Basically, no matter how you slice it, if you make a purchase with your credit card while abroad, you could be on the hook for FX fees.
Many people assume foreign transaction fees only occur when you're traveling internationally. Unfortunately, that's not the case.
The world wide web has made it so that we can shop from stores around the world without ever leaving our homes. But as far as your credit card issuer is concerned, those purchases were still made abroad.
In other words, if you make an online purchase with a foreign merchant, that purchase may be in a foreign currency. Even if you're charged in USD, the transaction will likely still go through a foreign bank. Either way, you can be charged a foriegn transaction fee.
For example, say you're shopping at Etsy.ca, the Canadian division of Etsy. Purchases you make will be processed by Etsy in Canada. That means a Canadian bank will be involved in the transaction. This opens you up to FX fees.
What's more, it doesn't matter which seller you use. You could buy from a U.S.-based seller, make the purchase in USD, and have it shipped to your U.S. address. But if Etsy's Canadian processing system is still involved, then a Canadian bank will be involved. And any involvement from a foreign bank could mean foreign transaction fees.
How much are foreign transaction fees?
The rate you're charged for a foreign transaction fee is set by the credit card issuer. Not all credit cards charge FX fees. In fact, the best travel rewards credit cards have no foreign transaction fees at all.
In general, however, the majority of cards will have some sort of FX fee. Most, but not all, issuers charge the same rate for FX fees across all of their cards, and those are typically 0%, 2.7%, or 3%
Of all the major credit card issuers, two don't charge foreign transaction fees on any of their cards: Capital One and Discover. This means you won't need to worry about FX fees no matter which card you have from either of these issuers. This includes several no annual fee options.
Where are credit card foreign transaction fees listed?
If your credit card charges a foreign transaction fee, it must list that fee in your credit card's Rates and Fees document. (This may also be called the Pricing and Terms document.) This is where all of your card's interest rates and other fees will be listed.
You were sent a copy of your card's rates and fees when the card was mailed to you. If you don't have your physical copy, you can typically download it from your online credit card account. In some cases, your foreign transaction fee rate may also be listed under the card details section on your account home page.
Most cards list the foreign transaction fee rate in the Fees section under the Transactions subsection. If there is no line for foreign transactions, your card likely does not charge a foreign transaction fee.
How can you avoid foreign transaction fees?
The simplest way to avoid foreign transaction fees is to use a credit card that doesn't charge them. The majority of travel rewards credit cards have 0% FX fees. Some of our favorite travel cards include:
You could also use any credit card from Capital One or Discover. Neither issuer charges FX fees on any of their credit cards. In some cases, your local credit union may offer a no foreign transaction fee credit card as well.
Another method to avoid FX fees is to use cash to make your purchases. If you're not using your credit card, the issuer can't charge you a fee.
The problem with using cash, however, is that you need to convert your money to another currency at some point. No matter where or when you do this, you're probably going to pay a fee for the service.
For example, say you use a debit card to pull money out of a foreign ATM. Chances are good your debit card will charge a foreign transaction fee for the ATM withdrawal. Using a currency conversion kiosk or merchant will also typically come with some sort of service fee.
