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Foreign Transaction Fee
22 Jun 2019

Foreign Transaction Fee 101: What They Are and How They Work

Recent studies show that 42% of people who travel use credit cards to fund at least a part of their adventures.

However, not all of those people understand whether or not a foreign transaction fee is part of their credit card’s policy. If it is, then it could mean losing out on a lot of the savings you think you’re earning by using rewards or points to fund a trip.

While foreign transaction fees might not seem like a lot, they can rack up wasted money fast. Not sure what they are?

They’re the charges you accrue when withdrawing money from a foreign ATM in a foreign currency.

The easiest way to avoid paying unnecessary fees to access your own money is to opt for a card with a $0 international transaction fee, and maybe even a few other travel perks on top of it.

What is a Foreign Transaction Fee?

Foreign transaction fees don’t refer to the exchange rate you have to deal with when taking out foreign currency.

Basically, a foreign transaction fee is something that an international institution charges you to withdraw money in a currency different than the one that your bank account is in.

This means that, if you bank with Bank of America and your account is in US dollars, then when you go to pay for a meal in euros on your next trip to Madrid, your card might charge you a percentage to make that transaction.

It makes sense in a way, as banking institutions have to do a little extra work to process a transaction in a foreign currency.

It doesn’t make sense, however, that you have to bear the brunt of those charges. There are ways around it!

When it comes down to it, these fees usually amount to about 3% of the total transaction.

Investopedia notes that, usually, 1% of this foreign transaction fee is from the payment processor, such as MasterCard or Visa, and the other 2% is from the card issuer or bank, like Bank of America or even Wells Fargo.

Travelers might think that this 3% might not sound like a lot. However, if you take a trip with your family and spend $5,000, then you’ll have accrued $150 in unnecessary charges during your entire trip.

How to Avoid Foreign Transaction Fees

The first step in avoiding foreign transaction fees is being aware of them!

Then, you have two options. You can either:

  • Withdraw cash from your home country before you travel
  • Use a credit card that’s optimized for travel and doesn’t have any fees for paying in foreign currency

The first option might seem like a good idea, but there are some dangers involved. Traveling isn’t inherently dangerous, but it’s never a good idea to carry large amounts of cash with you wherever you go.

You’ll also run into other related charges when you have to exchange the money once you arrive at your destination. Most currency exchange stores will charge you a fee, so you’re up against fees regardless of the option that you choose.

So, if you’re going to incur fees anyways, the best option is to look for a travel-optimized credit card that offers you no foreign transaction fees and other travel perks!

The ability to earn airline miles, hotel rewards and cash back points that you can use during your travels can help you save even more money in the long run.

However, you’ll need to be important about how you spend while monitoring your credit.

Finally, it’s important to note here that some cards off your the ability to pay in your own currency.

This means that when you go to check out at a clothing store in Switzerland, they’ll ask if you want to pay in Swiss Francs of US dollars. This is “dynamic currency conversion” and some people view it as a way around foreign transaction fees.

Not so fast! DCC exchange rates don’t usually favor the consumer, so you’ll be losing a lot more on the exchange rate than you might think.

Making Sense of Exchange Rates

Before diving into the best credit cards for travel payments, it’s important to understand how exchange rates work.

Depending on the kind of card you have, you’ll notice that exchange rates are a little different.

Financial markets determine the official exchange rate of various currencies around the world, but banks can set their own foreign exchange rates, too.

If you have a Visa card, for example, you can use their Visa currency conversion calculator to find out what the Visa exchange rate is. It’s very similar for the MasterCard exchange rate, too.

To do this, you’ll need to know a few things:

  • The currency of your card
  • The currency and amount of the transaction
  • The date of the transaction
  • The fee from your bank

Rates usually apply to the date that your bank processed the transaction. The Visa exchange rate for yesterday won’t apply to a charge that is processed today, for example.

This is important to understand when trying to make sense of foreign transaction fees.

A Bank of America foreign currency charge might not look right, but if you consider the factors listed above then you’ll be able to make better sense of the charges.

The Best Cards for Travel

Generally, when shopping around for a new credit card, experts recommend that you opt for a card with no annual fee. The same goes for foreign transaction fees!

However, you can reap the no-fee benefits with debit cards, too!

Discover’s Cashback Checking account offers no foreign transaction fees and will allow you to earn 1% cashback on up to $3,000 in qualifying purchases.

Another great travel debit card is the Capital One 360 Checking. With this card, you don’t face any currency conversion or foreign ATM fees and you can easily lock your debit card from your app.

This offers great peace of mind for travelers who might lose their card.

When it comes to credit cards, there are numerous travel-optimized credit cards.

Financial experts continue to name Chase as a top travel card. Why? Chase offers consumers more than a dozen no foreign transaction fee credit cards.

The Sapphire Preferred, Sapphire Reserve, and the Southwest and United cards all come with no transaction fees and lots of travel perks.

However, some of these cards do come with annual fees so it’s important to weigh the costs and benefits.

If you’re going to do a lot of spending in other areas anyway, then it might make sense to use this card to enjoy perks both domestically and internationally.

If you’re looking for a card with no annual fee, then go with the Wells Fargo Propel American Express card. You’ll get access to travel rewards in the form of three points for ever $1 you spend. And that’s on top of the no foreign transaction fee!

Other Unique Ways to Avoid Foreign Transaction Fees

Paying with a credit card isn’t the only way to avoid fees when withdrawing money abroad. There are numerous apps that exist that allow you to also access your money without losing a percentage of it.

TransferWise has recently become popular amongst travelers for the multi-currency debit card that they offer.

These kinds of “borderless accounts” are becoming more widely used and popular for people who travel a lot and want to avoid the hassle of dealing with exchange rates and credit card payments.

The best part about cards like these is that they connect to your normal bank account, meaning you’re spending only the money you have. This makes it easier to keep track of lines of credit, as you don’t have to take out any!

While this isn’t completely fee-free, it’s a great way to optimize spending if you do a lot of traveling or have to make a lot of payments abroad in different currencies.

Like any other financial move, you’ll want to weigh the fees and associated costs before making a decision.

Take a look at your current spending habits and your lifestyle to get a good idea of what kind of card or application might help you best optimize your finances.

Managing International Finances

There’s nothing that puts a damper on a vacation more than realizing you’re spending more than you had initially thought.

A costly foreign transaction fee can make or break your budget, the last thing you want to do is take out an installment loan to pay for your beautiful beach vacation that you thought would be in range, and learning how to avoid them is key in managing your finances both domestically and abroad.

Whether you are traveling abroad or need to make payments to a company or client in a different currency, there are ways around foreign transaction fees.

Being smart about the kind of card you’re paying with is the first step. Familiarizing yourself with all other aspects of financial health will help you ensure that you’re being smart about your money.

For more resources regarding financial health at home and abroad, access our learning center or contact us with any questions.

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