There’s nothing like a holiday vacation abroad to rejuvenate mind and body, and nothing like overseas card fees to steal your peace. We exaggerate (a bit), but a foreign transaction fee is something everyone wishes to avoid.
Check your card issuer’s website to learn what home fees and overseas fees they charge, and you’re likely to see foreign transaction fees in the latter category. That said, don’t worry if you’re going on an international trip. There are certain ways to avoid transaction fees overseas.
Understanding Overseas Card Fees: The Hidden Costs of Travel
Overseas card fees are known by many names. They may appear on your card statement as:
- Foreign transaction fees
- Foreign transaction service fees
- Foreign currency transaction fees
- International transaction fees
- Cross-border fees
Foreign transaction fees, cross-border fees, international transaction fees — whatever they’re called, they’re overseas card fees added on top of any purchases you make abroad or at a foreign retailer/acquirer.
Foreign transaction fees are a percentage of your actual credit card purchase. It typically ranges between 2% and 3%, and it is bundled with the cost of your purchase.
Example Computation
You have an American Express credit card, and you use it to pay AED 600 for dinner while visiting Ras Al Khaimah. Your bank charges a 2.5% foreign transaction fee. How much will you pay, and how will the transaction appear on your credit card bill?
- First, your bank will convert AED 600 to USD. At a conversion rate of AED/USD = 0.272294, that’s $163.38.
- Next, the bank will compute the foreign transaction fee. That’s 2.5% of $163.38 or $4.08.
- Finally, your bank will bill you $167.46, which is the sum of the $163.38 dinner and the $4.08 cross-border fee.
When Do Banks Charge Foreign Transaction Fees?
Banks charge a foreign transaction fee for:
- Point-of-sale transactions overseas: You’re visiting Ras Al Khaimah from the United States, and you use your credit card to pay for your stay at The Ritz-Carlton Ras Al Khaimah, Al Wadi Desert, your superbly aged steak dinner at Lexington Grill & Bar, and your Jais Flight zipline experience. All these transactions will be billed with foreign transaction fees.
- Online transactions with a foreign retailer or a merchant with a foreign acquirer, made while you’re overseas: You’re an international tourist already in Ras Al Khaimah. You book a five-day stay at Anantara Mina Al Arab on their website and pay with a credit card.
- Online transactions with foreign merchants or a merchant with a foreign acquirer, made while you’re still at home: While still at home in New York, you book a desert safari tour with a Bedouin Oasis Camp stop at a Ras Al Khaimah destination management company’s website and pay using your credit card.
Note: An acquirer is a financial institution that enables merchants to receive card payments. Buying online from a local merchant with a foreign acquirer (i.e., an acquirer based overseas) can lead to overseas card fees.
What Are Foreign Transaction Fees?
Foreign transaction fees are a risk mitigation measure. They help banks minimize their foreign exchange risks.
What is a foreign exchange risk (also known as exchange rate risk)? It’s the risk of losses due to exchange rate fluctuations. If you charge your card AED 600 today, it may be another three to five business days before that transaction gets settled on the bank’s side. During that period, the local currency could weaken against your home currency, and your bank will receive less money than anticipated. In other words, your overseas spend converts to less of your home currency than expected.
Foreign transaction fees are also a type of service or convenience fee. They’re the price you pay for the convenience of being able to charge overseas purchases on your card.
How to Avoid Overseas Card Fees: Your Pre-Trip Checklist
If you want to avoid transaction fees overseas, you can:
1. Get a Travel-Friendly Card with No Foreign Transaction Fees
Foreign transaction fees are the default among credit cards, but there are credit cards that do not charge them. Get that card, and use it for purchases abroad or when buying online from foreign retailers.
2. Open a Multi-Currency Account or Travel Card
You can get a multi-currency or travel card. Inquire with your bank if they have such a product.
A multi-currency card has multiple currency wallets; i.e., it can store multiple-currency balances. Some cards will allow you to maintain balances in more than fifty currencies. You can load funds into currency balances according to your preferences. For instance, if travelling to Ras Al Khaimah, you can load funds into your UAE dirham balance.
By keeping your multi-currency or travel card’s UAE dirham balance funded, you can pay for card transactions in AED. This eliminates the need for future currency conversion and allows you to circumvent foreign transaction fees.
3. Pre-Order Local Currency Strategically
Order foreign currency from your bank when the exchange rate is favorable, i.e., when the foreign currency weakens against your home currency. You can use that to load money into your multi-currency account or travel card.
Note: This complements tip number two above. It minimizes currency conversion fees because every unit of your home currency buys more of the foreign currency when the latter weakens against the former.
Smart Spending Abroad: Tips for When You’re on the Road
Here are tips to help you minimize your overseas costs or maximize the value of your overseas spending.
1. Always Choose Local Currency (Avoid Dynamic Currency Conversion)
Some foreign merchants will ask you if you want your card charged in your home currency. Don’t accept that option.
Instead, choose to always pay in the local currency (the currency of the country you’re in). Check your charge slip or your check at the restaurant, and make sure your charge is expressed in the local currency. If you’re in Ras Al Khaimah, the charge must be in UAE dirham.
Why is this important? If you accept the offer of the home currency charge, dynamic currency conversion will apply.
Your transaction will be converted to your home currency at the point of sale using the exchange rate set by the foreign retailer, its payment processor or a third-party currency conversion processor. Such an exchange rate is often higher than the card network rate (i.e., the exchange rate used by card networks like Mastercard, Visa, American Express, Discover, and JCB) and may have additional fees bundled in.
In other words, dynamic currency conversion will cost you more money.
Meanwhile, if you choose the local currency charging option, currency conversion will take place later (when the merchant settles the transaction). Your card issuer will also use the more reasonable rates set by card networks.
2. Be Smart About ATM Withdrawals
If you can avoid it, do not withdraw money from ATMs abroad. Banks charge higher fees on international (non-local) cards for ATM withdrawals. Credit card withdrawals are also typically added to cash advance balances, which carry a higher interest rate than card purchase balances.
If you must have the option of withdrawing from ATMs and want to know how to avoid ATM fees overseas, there is one way. Use a multi-currency card or travel card (preferably issued locally) preloaded with the local currency.
Furthermore, plan your withdrawals. Compute how much cash you need and try to withdraw that all at once. The secret to keeping ATM fees down is to make larger but less frequent withdrawals.
3. Utilize Your Card’s Benefits and Perks
When planning your itinerary, check your credit card’s benefits and perks. Read the terms and conditions attached to each one to ensure you can take advantage of all of them.
Examples include:
- Travel insurance: You may be insured for flight cancellations, baggage losses, and accidents, but you may have to call customer support to get a certificate of insurance before you leave.
- Airport lounge access: You may have complimentary access to international airport lounges, subject to minimum-spend requirements or other conditions.
- Points, Cashback, or Miles: Credit cards may reward you with points, cashback, or miles for every spend, and may give you a higher reward for overseas spending. Read the terms to know how to maximize these rewards.
Frequently Asked Questions (FAQs) About Overseas Fees
Does paying in my home currency at a foreign retailer save me money?
No. Paying in your home currency at a foreign retailer will not save you money. It will actually cost you more money because it triggers dynamic currency conversion. This usually uses a less favorable exchange rate (more expensive for you). It’s better to charge overseas transactions in the local currency to take advantage of better currency conversion rates.
Do online purchases from a foreign website incur a fee?
Yes. Online purchases from a foreign website incur a foreign exchange transaction fee. When you buy online from a foreign retailer or a merchant with a foreign acquirer, foreign transaction fees also apply.
Is it better to use a debit or credit card when traveling?
It depends. It’s better to use a credit card for point-of-sale transactions overseas. It’s better to use a debit card for ATM withdrawals.
