Foreign Transaction Fee: Definition & How it Works?
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There’s probably no person in the world who’ll be happy to pay a foreign transaction fee next time they go shopping. Still, most financial providers charge fees for foreign transactions, as they need to offset the costs associated with such operations.
But there’s actually far more to this topic than just sulking over having to shell out more money to the bank! Read on to learn how you can avoid paying an international transaction fee on your future purchases.
What is an International Transaction Fee?
A foreign transaction fee is a charge imposed by credit card issuers or banks when you make a purchase in a foreign currency or through a foreign-based merchant. They typically range between 1-3% of the transaction amount, and stay the same for online and offline stores. Most of the time, this fee is charged in addition to the currency conversion service fee. It is applied to any monetary operations in foreign stores, platforms, POS, etc.
But what is the international transaction fee on my bank account, we hear you ask? To properly understand the answer, we’ll need to delve a bit deeper into how this system functions.
How Foreign Transaction Fees Work
What is a foreign transaction fee? On a basic level, it is an additional payment charged by your card issuer and payment processor to offset the actual and potential transaction costs. Besides the more obvious expenses like technical maintenance and currency conversion, some providers require compensation for international transactions because of the increased fraud-related risks. Most foreign transaction fees include:
- 1% payment processor fee (Visa, Master Card).
- 1-2% fee charged by the card issuer.
2-3% is not that much, right? However, note that the fee is charged for each transaction made abroad. This means that if you spend 10,000 dollars during your trip, you’ll have to pay about 300 USD in fees on top of all the other charges. A significant overpayment, isn't it?
In other words, the fee is negligible as long as don’t spend much in the first place, but will increase proportionally to your transaction volume. Therefore, if you plan to spend a significant portion of the year abroad, using regular bank cards might not be the best idea.
Next, let's compare the international transaction rates of the major card issuers and see which one should be your go-to.
Credit Card Foreign Transaction Fee Chart
First things first: most US financial institutions charge foreign transaction fees. This can be either a standard operational fee or an additional charge for the DCC (Dynamic Currency Conversion) service. This fee does not exceed 3% and sometimes can be avoided entirely.
Here is a comparison of credit card international fees from key US financial providers. Note that we’re talking about the common cards rather than special travel ones designed specifically to alleviate foreign transaction fees.
Bank | Issuer Fee | Card Manufacturer Fee | Total Overcharge |
|---|---|---|---|
American Express | 2.7% | – | 2.7% |
Chase | 2% | 1% | 3% |
Discover | – | – | – |
Bank of America | 2% | 1% | 3% |
Wells Fargo | 2% | 1% | 3% |
Capital One | – | – | – |
Others | 2% | 1% | 3% |
Please note that if you use a card associated with a third-party provider (like store-specific cards), the rates may be higher. However, even the standard 2.7-3% that most banks charge can add up rather quickly. Thankfully, there are a few options that can help you reduce your expenses when shopping at foreign online and offline stores, withdrawing money from regionally charged ATMs, and more.
How to Avoid Foreign Transaction Fees
Imagine you're going on an international trip and plan to spend a relatively large amount of money, say $10,000. Under normal circumstances, your credit card foreign transaction fee would add up to $300, not including additional services like DCC. How can you reduce this number?
There are at least three ways:
- Apply for a specialized travel card at your bank.
- Exchange currency before your trip.
- Open an account that does not charge fees for international transactions.
Let’s take a closer look at each option and its pros and cons.
Get a Credit Card That Doesn’t Charge Foreign Transaction Fees
The first way to avoid foreign transaction costs is to get a new physical credit or debit card that has special terms for foreign transactions. This could be a travel card from AmEx or a similar card from another bank.
Pros | Cons |
|---|---|
There's no need to open an account with a different bank. No impact on your credit score. Ability to quickly top up your balance via mobile banking. No need to carry cash while traveling. | Extra card in your wallet. Risk of mixing up cards during payment. The card probably won’t give you any bonuses when not traveling abroad, so you better switch back to your regular card once back in the US. |
This option is suitable for you if your bank offers specialized cards for international travel with no fee for cash currency purchases or exchanges on transactions abroad.
Exchange Your Money Before Leaving
You can avoid paying a credit card international transaction fee by not using credit cards at all. Instead, you can withdraw and exchange a certain amount of cash before your trip and rely on it during your travels. Another option is to open a specialized bank account, which will do the same thing digitally.
Pros | Cons |
|---|---|
No fees on transactions. Ability to quickly top up the account (for cards in local currencies). No service fees. | Need to carry cash. There might be legal restrictions on the amounts of cash you can bring when crossing international borders. The currency exchange fee and balance charge (for online cards). |
The main downside is that physical money may be subject to restrictions. What’s more, if you're forced to spend all the cash you have on some emergency, you’ll be facing a very real risk of getting stranded in a foreign country.
Open a Bank Account With No Foreign Transaction Fees
Two of the major US banks, Capital One and Discover, simply don’t charge international transaction fees. So, you can just open an account at either of these banks, add their associated cards to your e-wallet, top them up before starting your trip, and you’re ready to go.
Pros | Cons |
|---|---|
No fees for foreign transactions. Access to rewards programs. Good rates. Additional bonuses for travelers. | Extra card in your wallet. Potential impact on your credit score for opening a new card. |
In certain countries, it's possible to open local accounts and use the local currency without incurring fees. However, this option is usually available only if you plan to live in the country for a significant period of time.
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Most financial and banking providers in the US impose a 1-3% fee on transactions made outside the country, including purchases on international marketplaces. However, there are some notable exceptions, such as Capital One and Discover. There are also several ways you can save money or even avoid international transaction fees altogether. Stick to them and travel without unnecessary expenses!
