Foreign Transaction Fees Vs. Currency Conversion Fees: What’s The Difference? (2024)

The excitement of international travel is often found in the unknown and unfamiliar. However, the unexpected costs associated with international purchases are unlikely to add to your adventure experience. Thankfully, if you plan ahead, you can take the mystery out of the fees that arise with foreign purchases.

When you receive your credit card statement, often weeks after your trips, the details of your transactions are likely a mystery. In general, the terms are often confusing. A currency conversion fee may also be referred to as a “foreign currency exchange fee,” which can sound a lot like a foreign transaction fee.

Furthermore, currency conversion fees are often rolled into your foreign transaction fee or included in the purchase price. Because currency conversion fees do not post separately to your statement, you may never notice them. And if you try to save on fees in the future, you may be unsure of the true cost.

Quick Tips

• Use a card without foreign transaction fees when traveling and shopping online
• Make purchases in local currency
• Download a currency conversion app before you travel

Foreign Transaction Fees

Foreign transaction fees are a predetermined percentage charged by your credit card issuer for making a purchase from a foreign merchant. The fee is clearly stated on your credit card agreement and can range from 0% to 3%. Before you travel, determine what your foreign transaction fee is and if you hold a card that doesn’t have one.

Any time you make a purchase from a foreign merchant, you could find this fee added to your purchase. Be aware of these fees when shopping online with foreign merchants, buying a ticket for a foreign museum or tour, purchasing a plane ticket from a foreign airline or making hotels and car rental reservations abroad. Even if you don’t travel regularly, it may be wise to have a credit card with no foreign transaction fees available if you shop outside of your home country.

How Much Could You Pay

If you make 15 international purchases at $25 each, you would pay $11.25 in foreign transaction fees with a 3% transaction fee rate.

Be aware of the fine print. If your credit card charges $1 or 3% of each purchase in U.S. dollars, whichever is greater, you could end up with a $1 surcharge on your $1 bottled water purchase.

If you plan an international trip, an extra 3% on taxis, food and hotels could significantly cut into your budget. Assuming $3,500 in spending, you could pay $105 in fees.

How to Avoid Foreign Transaction Fees

If your credit card charges a foreign transaction fee, you can exchange money with your bank before you travel. Be aware that carrying large amounts of cash has considerable risk associated with it and you may not have access to the best rate by exchanging money before you leave. Banks and airport exchange services typically charge a commission on currency exchange and may also charge a service fee. There’s typically no need to arrive with money in your pocket as you can use an ATM upon arrival.

The best way to get cash overseas in local currency is to use an established bank’s ATM and pull money out in local currency. There are banks, such as Charles Schwab, that offer free ATM withdrawals and will even reimburse ATM fees charged by the out-of-network ATM.

Consider applying for a new credit card with no foreign transaction fees before your next trip. You can maintain the security features of a credit card without the added cost. All consumer Capital One and Discover cards and many travel reward credit cards come without foreign transaction fees. The savings from such cards can add up quickly, especially if you are using a card with no annual fee.

Currency Conversion Fees

Unfortunately, currency conversion fees are not as straightforward. While a foreign transaction fee is charged by your credit card issuer, a currency conversion fee can be charged by the credit card payment processor or the individual merchant.

If the fee is generated by your credit card payment processor, the Consumer Financial Protection Bureau indicates that these fees must be disclosed as a transaction fee on your card agreement. In most cases, this fee is built into the foreign transaction fee assigned to your card. A foreign transaction fee of 3% may comprise a 2% foreign transaction fee and a 1% currency conversion fee.

If your credit card offers no foreign transaction fees, the credit card issuer likely absorbs the currency conversion fee.

Optional Currency Conversion Fees

Typically, a purchase at a foreign merchant is made entirely in the local currency. The cardholder authorizes the amount of the purchase in the local currency and the purchase price is not converted until the payment is processed.

When you make a purchase at an international store, you may be asked if you want to convert your purchase to your home currency. This service is provided at the point of sale as a value added service and allows you to know the converted price at that moment—but don’t be fooled; it comes at a cost.

While this may initially sound like a wise way to avoid fees, these charges are in addition to any foreign transaction fees your card may apply. These fees assessed by the merchant at the point of sale are called Dynamic Currency Conversion or DCC. You can think of DCC as an added service and just like most services that make life easier, there is a convenience charge. Plus, even when using DCC, you will usually be charged a foreign transaction fee by your card issuing bank unless your card has no foreign transaction fees.

A better bet is to either download a currency conversion app to your phone or memorize the exchange rate so you know how much you’re paying in local currency without being charged an additional fee.

How Currency Conversion Works

At the point of purchase you are asked if you would like to purchase in the local currency or your home currency. If you select your home currency, the purchase price will be converted at that moment and the exchange rate will be posted on the point of sale. There is almost always a significant commission built in. The currency conversion fee will be built into the total price charged to your card, but your bank may still charge a foreign transaction fee.

It is worth noting that you may not receive the best exchange rate. Large credit networks like Visa and Mastercard negotiate competitive exchange rates that are usually far better than the rates offered by DCC. It’s almost never a good idea to accept the rate in dollars instead of local currency. Instead, use the dollar rate as a guideline and know that your purchase price will be a little less than that when you get your bill.

There are a variety of DCC providers. When you make a purchase, the vendor must disclose the exchange rate used but not the markup imposed, so it can be difficult to tell just how much you’re paying in additional charges to use the DCC option.

How To Avoid Currency Conversion Fees

• Purchase in the local currency:By allowing your card issuer to control when they process the conversion, you ensure you get a well-negotiated exchange rate.
• Use a reputable card network: To protect consumers, Mastercard and Visa provide regulations for DCC compliance. Any vendor accepting Mastercard or Visa is required to abide by these guidelines.
• Use currency conversion apps: If you are curious about the conversion rate on your purchase, use Google or a reputable currency conversion app. You will get a rough estimate of the cost without any additional fees.

Bottom Line

Whenever you travel abroad or make purchases online with a retailer that’s not based in the U.S., choose a card with zero foreign transaction fees and make credit purchases in the local currency. You could save hundreds of dollars over the course of an international trip.