A credit card can be an essential tool when taking a foreign trip, but there are several potential drawbacks that travelers need to be aware of. Credit card issuers and payment processors have found ways to impose additional fees on foreign transactions, often on unsuspecting travelers.
Foreign Transaction Fees
Buried in your credit card's terms and conditions can be a fee that is hard to understand, and even harder to justify. A "foreign transaction fee" of 3 percent is frequently added to all purchases processed outside the United States. This is not a currency conversion fee, as it also applies to foreign purchases made in U.S. Dollars. In fact, you don't even have to leave the United States in order to be charged this fee, as it can be imposed even when making a purchase from a foreign company. So long as the charge is merely processed outside of the United States, you can be subject to this fee.
But what does this fee actually cover? Not much, as banks routinely convert funds between different currencies at the most favorable rates called interbank rates. Furthermore, there is really no documented costs that a card issuer incurs as a result of a transaction being processed outside of the United States. In fact, in a class action suit against these fees, a court found that Visa and MasterCard "merely act as a clearinghouse, performing arithmetical calculations at insignificant cost." The inescapable conclusion is that these fees simply represent pure profit for card issuers while adding no tangible value to cardholders.
Thankfully, these fees are easy to avoid. There have always been some credit card issuers that haven't charged foreign transaction fees, and there is an increasing number of credit cards that have recently removed these fees, typically cards that marketed to international travelers. If you are planning on taking an international trip or making a purchase from a foreign company, be sure to contact your card issuer and ask if a foreign transaction fee will apply. When you're considering applying for a new credit card, check its terms and conditions to see if it has a foreign transaction fee.
Dynamic Currency Conversion Fees
If there is a charge that is even more insidious than the foreign transaction fee imposed by card issuers, its the so-called dynamic currency conversion fees that can be added to your transaction by merchants and credit card processors. Before opting customers into this "service," merchants are supposed to ask their customers if they would like to have payment made in their home currency. If approved, the customer then receives a receipt showing the amount charged in U.S. Dollars or the currency used by the nation of the bank that issued the card.
But in practice, a large fee is added to the transaction, often on the order of 5-10 percent, merely for displaying the price in a different currency. To make matters worse, the credit card processors offer a share of this markup to participating merchants, and this service is marketed to merchants as a way of making additional profits from foreign customers. As a result, merchants have little incentive to properly disclose additional fees imposed by this scheme, or to actually obtain consent from their customers. And when you combine the perverse incentives to opt customers into dynamic currency conversion against their will with the inevitable language barriers faced by travelers, this system is ripe for abuse.
To avoid being taken advantage of, always decline any offers to pay in your home currency, and closely examine your receipts for signs of additional markups. And if you feel that you've been a victim of a merchant imposing these fees without your consent, you can request a charge back specifically for the commissions imposed by dynamic currency conversion.
By understanding how the credit card industry seeks to profit from your international purchases, and by avoiding these charges, you can enjoy the security and convenience of your credit card without the additional costs.