When you return from an overseas vacation, your credit card bill might be fatter than usual, and not always for the reasons you’d expect. Tucked in among your flight, food and souvenir purchases might be credit card fees you could have avoided — namely, foreign transaction fees and dynamic currency conversion fees.
It’s easy to lump foreign transaction fees and currency conversion fees together, because they sound similar. But they’re actually two different charges, from two different sources:
— A foreign transaction fee is charged by your credit card issuer when you make a purchase outside the U.S. These usually range from 1 to 3 percent of the transaction total and are listed separately on your credit card statement.
— A dynamic currency conversion fee, or DCC, is charged by the merchant’s bank at the point of sale — at the cash register, so to speak — when you opt to view the purchase amount in U.S. dollars rather than in the local currency. These fees often add 3 percent or more to the cost, and because they are generally folded into the exchange rate offered at the register, they’re all but invisible.
[See: 12 Ways to Be a More Mindful Spender.]
If you’re not careful, you could end up paying both of these fees on the same purchase. Skipping these charges is just a matter of using the right credit card at the right time and getting your receipt in the local currency. Making a few small changes could save you hundreds of dollars while traveling, without changing your trip itinerary one bit.
How to Avoid Fees
When converting major currencies, a 2.5 to 3 percent fee on each transaction is considered a competitive rate, says Natasha Lala, chief of staff at Oanda, a company that provides foreign-exchange trading services and live-streaming currency exchange rates. That’s about the same as the foreign transaction fees some credit card companies and DCC operators charge. So how do you sidestep these fees?
“Your credit card rate is likely the best option,” Lala says.
Next time you travel, try this:
Pay with a credit card that doesn’t charge a foreign transaction fee. Some issuers, including Discover, Capital One and Pentagon Federal Credit Union, don’t charge foreign transaction fees on any of their cards. Other issuers exempt their travel credit cards from foreign transaction fees but charge them on other cards.
Look at your card’s Schumer box — the “terms and conditions” chart that details the rates and fees — to see what the issuer charges for each transaction. (You can typically find the box on the issuer’s website.) If you’re looking to apply for a new credit card before your trip, check NerdWallet’s list of top credit cards with no foreign transaction fees.
Pay in the local currency, always. “There are many places around the world who ask, ‘Do you want to pay in your local currency or your home currency?’ Hotels and hostels, you name it, they’ll always ask you that question,” says Matt Kepnes, who has visited more than 80 countries and runs a travel blog called Nomadic Matt. He’s found that this currency conversion option is the norm in countries where credit cards are widely accepted. “You always want to steer clear of it,” Kepnes says. If you opt to see your total in U.S. dollars at the register, you’ll end up paying more for your purchases.
[See: 10 Money Leaks to Shut Down Now.]
This costly convenience won’t stop an issuer from charging the usual foreign transaction fees, either. These fees are charged based on where the transaction takes place, not the currency involved. However, a few issuers, including U.S. Bank, State Employees’ Credit Union and BMO Financial, do charge slightly less for foreign transactions already converted to dollars.
If you need to know what a purchase will cost you in dollars, use a free rate calculator app on your smartphone before checking out. Kepnes says he uses an app called Currency to figure out how much he’s spending.
Checking the Exchange Rate
If your credit card doesn’t charge foreign transaction fees, you might suspect it makes up for that by fudging the exchange rate. That’s not the case. In fact, your issuer has little to do with your exchange rate.
When you make a purchase abroad in the local currency, your credit card’s payment network — Visa or MasterCard, for example — will convert it to dollars based on its own rates, which are roughly identical to market rates. At the time of this writing, for example, Visa valued 1 euro at about $1.12, and MasterCard put it at about $1.11. Oanda, whose data are used by financial institutions, also set a euro’s value at about $1.11.
That means you could pay roughly the fair market exchange rate for your purchase, with no fees or padded exchange rates. That’s a good deal.
But when you select the DCC option at the register, it’s a different story. Although these conversions tend to rely on standard exchange rates, they come with fees attached — and often, Kepnes says, those fees are rolled into the exchange rate.
“I’ve never seen a fee broken out separately,” Kepnes says. “I’ve just seen it as, ‘This is the exchange rate, sign here.’ “
Fexco, for example, which bills itself as the “originator of dynamic currency conversion,” sources its rates from Reuters but also adds its own fee to that rate — and that’s where it gets pricey. Visa and MasterCard’s global compliance standards require that these exchange rates be disclosed to you upfront. But you won’t be able to avoid them by using a certain credit card at checkout. Instead, you’ll have to decline the conversion service at the register.
Beyond the Fees
Credit card fees, of course, aren’t the most expensive part of traveling. But if you’re trimming costs, eliminating these charges is a good place to start. If you want to take those savings further, look for more affordable airlines and accommodations. Travel to a country where the dollar is strong. Shop for food at local markets rather than dining out for every meal. And track your spending — fees and all — so you won’t be surprised by your credit card bill when you return.
[See: 50 Ways to Improve Your Finances in 2016.]
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Planning an International Getaway? Watch Out for These Credit Card Fees originally appeared on usnews.com
