If you love to travel outside the U.S., watch out for credit card foreign transaction fees.
A foreign transaction fee is a charge that credit card issuers sometimes add to purchases you make on your card when traveling abroad. You may also see this fee when you are still in the U.S. but make a purchase with a foreign merchant or in a foreign currency.
Typically, you will pay a foreign transaction fee when a purchase goes through a foreign bank or when you make a purchase in a currency other than U.S. dollars, says Julie Heath, director of the University of Cincinnati Economics Center.
Issuers can have their own rules about these fees, including when they are assessed and how much they cost. Rules regarding foreign transaction fees should be spelled out in your cardholder agreement, according to the Consumer Financial Protection Bureau. You can also call your issuer before you travel to learn whether you will pay any fees for using your card outside the U.S.
Many credit cards do not charge foreign transaction fees at all, allowing you to shop abroad without worrying about these extra costs.
[Read: Best No Foreign Transaction Fee Credit Cards.]
How Does a Foreign Transaction Fee Work?
“If you’re in Italy and you pay for your amazing pasta dinner with your credit card, you will be charged this fee,” Heath says. “The restaurant is located outside the United States, and your purchase is done in a currency other than dollars.”
These fees are small. If you are traveling outside the U.S. and use a card that charges foreign transaction fees, you will typically incur a fee of 1% to 4% of the purchase amount, says Joel Jensen, general manager of credit card revenue at Nav, a business financing resource.
However, over many purchases, “this cost can add up quickly,” Jensen says.
You do not have to travel outside the U.S. to incur these fees. “If you make a purchase while in the U.S. with a merchant that operates outside the U.S., you may be charged this fee as well,” Jensen says.
It’s also possible to be charged a foreign transaction fee on a purchase in a country that uses the U.S. dollars as its currency, Health says.
For example, Ecuador uses the U.S. dollar as its currency. “But because the transaction is routed through a foreign bank, you’ll be charged the fee,” Heath says.
[Read: Best Travel Rewards Credit Cards.]
Do All Credit Cards Have Foreign Transaction Fees?
Credit card companies charge foreign transaction fees for an obvious reason, Heath says. “Much like the other fees, it is a source of revenue for the issuer,” she says.
However, not every credit card charges foreign transaction fees. “The best way to avoid these fees is to use a credit card that doesn’t charge them,” Heath says. She urges you to “look for cards that explicitly say, ‘no foreign transaction fee.'”
Card issuers must disclose all of their cards’ fees thanks to the Truth in Lending Act. Heath says that when a card has a foreign transaction fee, the credit card agreement states that fact in a section called “Pricing and Terms” or “Rates and Fees.”
How Is a Foreign Transaction Fee Different From a Currency Conversion Fee?
A currency conversion fee is a type of charge that can occur when a credit card or debit card payment network or ATM network converts one type of currency — such as the U.S. dollar — to another currency, such as the euro.
“A card on a branded network such as Visa or Mastercard will incur a currency conversion fee that is usually built into the foreign transaction fee charged by the issuer,” Jensen says. “In other words, the network charges the card issuer, and the card issuer decides whether to pass it along to the cardholder.”
The currency conversion fee often is lumped together with the foreign transaction fee. If your card charges a currency conversion fee, it may cost about 1% of the purchase price, according to Capital One (Capital One does not impose a currency conversion fee).
In some cases, a foreign merchant may give you the option of making your purchase in U.S. dollars. This process is called dynamic currency conversion, and it may or may not help you avoid a foreign transaction fee. Even if you don’t pay a foreign transaction fee, you might be charged an even higher fee to pay in U.S. dollars.
[Read: Best Airline Credit Cards.]
How to Avoid Foreign Transaction Fees
You may be able to avoid foreign transaction fees with a travel rewards credit card. These cards are designed with travelers in mind, and many do not charge foreign transaction fees.
U.S. News has highlighted some of the best credit cards with no foreign transaction fee. Cards with no foreign transaction fee include:
— Discover it Miles. Best feature: Travel rewards.
— Discover it chrome. Best feature: Gas cash back.
— Discover it Cash Back. Best feature: Cash back on everyday purchases.
— Capital One VentureOne Rewards Credit Card. Best feature: No annual fee.
— Capital One SavorOne Cash Rewards Credit Card. Best feature: Cash back on dining with no annual fee.
— United Explorer Card. Best feature: United Airlines rewards.
— Hilton Honors American Express Card. Best feature: Hilton hotel rewards.
— Delta SkyMiles Gold American Express Card. Best feature: Delta Air Lines rewards.
— Marriott Bonvoy Bold Credit Card. Best feature: Marriott rewards with no annual fee.
— Discover it Balance Transfer. Best feature: 0% introductory annual percentage rate for 18 months on balance transfers and six months on purchases, after which a 16.49% – 27.49% Variable APR applies.
But even if you avoid foreign transaction fees, you may encounter additional costs when shopping overseas with a credit card. “The out-of-country purchase will be converted to U.S. dollars at an exchange rate that is usually competitive but you don’t have any control over,” Jensen says.
Another way to avoid foreign transaction fees is to pay for items in the local currency. However, some travelers are wary of carrying large amounts of foreign currency in their wallets, and you may need to exchange currency during your trip. If you go to an ATM in a foreign country to withdraw more of its currency, you may owe fees for the privilege.
Though a card without a foreign transaction fee can make sense for those who travel frequently in other countries, keep in mind that it might not be the best card for shopping inside the U.S.
“For purchases in the U.S., they may want a card that offers other rewards or a low interest rate,” Jensen says.
More from U.S. News
How to Get Free Flights With Credit Card Rewards
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How Do Airline Miles Work? A Getting Started Guide
What Is a Foreign Transaction Fee? originally appeared on usnews.com
Update 05/03/22:
