Gone are the days of traveler's checks and pricey cash currency conversions. Now when you travel abroad, you can use your American credit card to pay for things wherever credit cards are accepted. It certainly makes for a more convenient experience.
However, when you get home and look at your credit card statement, you might be surprised to notice that in addition to your purchases, you have been assessed a "foreign transaction fee" on the transactions you made abroad.
Foreign transaction fees are assessed by your credit card issuer when your credit card is used in a transaction that is processed by an overseas retailer—or even when a transaction is processed by an overseas bank when you're buying something online while in the U.S. This fee can range between 1% and 3% of the purchase, though 3% is most common. And it's levied not once, but on every single transaction that occurs outside the U.S.
That 3% fee might not sound like a lot, but when it's assessed on every single purchase, it can add up. For example, if you spend $200 at a restaurant in Germany, you'll end up paying $206 with a 3% foreign transaction fee. Let's say you end up spending $4,000 on your trip abroad—you'll pay an extra $120 for the privilege of using your credit card. (Note: having a chip card is helpful for international travel; many places in Europe, for example, don't accept cards with a magnetic stripe anymore.)
The Two Parts of a Foreign Transaction Fee
The foreign transaction fee is usually composed of two parts. The first part is a fee levied by your card's issuing bank. So if you have a card from Chase, that bank will assess a 1% to 2% fee on any purchase made abroad.
But the card's payment network, such as Visa or Mastercard, will tack on another fee, typically 1% of the transaction. That's known as a currency conversion fee, which is assessed by the payment network when a purchase is made in a currency other than U.S. dollars. So when you buy something for, say, 10 euros, your credit card's payment network will convert that transaction to the equivalent of U.S. dollars and assess a conversion fee. Then, your bank will charge the foreign transaction fee. The total fee will equal about 3% of the purchase.
How to Avoid Foreign Transaction Fees
The good news is that you don't have to pay this fee if you travel with the right credit card. Many cards have gotten rid of foreign transaction and currency conversion fees altogether (or absorb the cost and don't pass it on to the customer). Because there is so much competition for travel credit cards, the elimination of foreign transaction fees has become a common feature on many cards marketed to consumers who travel a lot.
Some issuers, like Discover, don't charge foreign transaction fees on any of their credit cards, while other banks offer specific cards that don't levy the charge. The Chase Sapphire Reserve®, for example, is a premium rewards credit card that doesn't levy foreign transaction fees.
Experian CreditMatch offers a variety of cards without any foreign transaction fees.
To check whether your credit card issues these fees, look in the "fees" section of your card's disclosures. It will be listed along with other credit card fees, like balance transfer fees and cash advance fees.