What is a Foreign Transaction Fee and How Does it Work?
Why does your card issuer or financial institution charge you foreign transaction fees? How can you avoid paying them without hurting your credit score or financial happiness? This article gives you the simplest explanation of what a foreign transaction fee is, how it works, and various ways to avoid paying it.
What is a Foreign Transaction Fee?
Any amount your financial institution charges you for using your card to make a payment in an international currency is called a foreign transaction fee. It is usually about 3% of your card payment to the overseas seller or service provider. This fee applies when you shop online, in person, or withdraw cash from an ATM abroad.
What is included in a foreign transaction fee?
In general, a foreign transaction fee includes two charges. The first one, usually about 2%, is deducted by the neobank, traditional bank, fintech company, or other financial institution that issued the card to you. The second part, often around 1%, is charged by the card network, such as Mastercard, Visa, American Express, or Discover.
When would you have to pay a foreign transaction fee?
In most cases, you can expect to pay a foreign transaction fee whenever you purchase an item in a currency other than the one used in the country where your card was issued. For example, let us assume that you live in Germany and your local bank gave you a card designed to support transactions in euros. If you use it to pay for items purchased from an eBay seller in the United States, when your financial institution starts processing the transaction, your money (euros) will be converted to US dollars. A foreign transaction fee, which is a percentage of the amount to be paid, will be charged to complete the funds transfer.
It is also worth mentioning that a foreign transaction fee can be charged when you use ATMs abroad. However, depending on the currencies supported by the machine and the provisions of your card issuer, you may not have to pay a foreign transaction fee in some countries.
What is the Cost of Foreign Transaction Fees?
There is no fixed fee for foreign transactions charged on credit cards. That is because the cost varies from one card to another. Nonetheless, it ranges from 1% to 4% of the amount to be paid per transaction. For example, for every $50 spent overseas, a cardholder who has a 4% foreign transaction charge will have to pay an extra $2. These fees can add up to a substantial amount if you use your card to make several big purchases abroad. For this reason, ensure to read the terms and conditions of your credit card to know how foreign transactions will be charged.
What is a high foreign transaction fee?
Any foreign transaction fee above 3% should be considered high. That is because it has gone beyond the average cost charged by most card issuers. Besides, you should try to avoid a card that comes with a high foreign transaction fee, especially if you are a frequent traveller, such as a digital nomad.
Where to Find the Foreign Transaction Fee on Your Credit Card
When a credit card charges foreign transaction fees, the issuer will normally not publicise the fact that it does. Hence, it is safe to presume that a card will charge foreign transaction fees if its features do not include a note like "No foreign transaction fees." Therefore, check the terms and conditions, rates, or pricing of the credit card you want to buy to confirm this information. If you still cannot find it, contact the customer support team of the card issuer for clarification.
Is it every credit card that has a transaction fee?
No! Some credit card issuers do not charge a foreign transaction fee. So, you can get your payment cards from them to reduce the cost of spending your money overseas. Examples of financial institutions that offer the best cards with no foreign transaction fees are:
Five Ways to Avoid Foreign Transaction Fees
If you do nothing about your foreign transaction fees, they can add up suddenly and ruin your vacation, honeymoon, conference, or any other travel experience abroad. For this reason, it is helpful to consider our advice on how to avoid foreign transaction fees, which is as follows:
- Get the best travel credit cards
If you are a frequent traveller, the wisest way to minimise your expenses abroad is to get any of the best travel credit cards. With them, you can enjoy perks and rewards, such as no foreign transaction fees, mid-market currency exchange rates, and travel points and miles.
- Use a debit card with no foreign transaction fees
Aside from credit cards, there are debit cards you can use for international purchases without paying foreign transaction fees. So, before the day your journey begins, you might want to find out whether the debit card linked to your checking or savings account can allow you to make fee-free transactions overseas.
- Open a multicurrency account
Multicurrency accounts are provided by top neobanks, crypto trading platforms, payment service providers, traditional banks, EMIs, fintech companies, and some other financial institutions. Such accounts can be used to avoid foreign transaction fees. How? With them, you can hold about 20 different currencies on a card and pay for anything without always having to make conversions when shopping abroad. Besides, most multicurrency accounts support popular international currencies, which include the euro (EUR), US dollars (USD), and pound sterling (GBP).
- Use multicurrency ATMs
A multi-currency automated teller machine gives you access to your funds held in different currencies. There are multicurrency ATMs in some foreign countries, and you can use them to make fee-free withdrawals in EUR, USD, or GBP, as long as your card issuer has enabled it. They are available in many countries in the eurozone and some other developed economies.
Some card issuers will not charge you a foreign transaction fee when you withdraw a foreign currency from an overseas-based ATM that supports it. For example, in the Single Euro Payment Area (SEPA) or Eurozone, your bank might allow you to make fee-free withdrawals at all euro-supported ATMs. Again, this depends on the terms and conditions of your multicurrency card.
- Travel with the foreign currency
If you do not mind carrying cash, you can exchange your local currency for that of your destination country before beginning your journey. This is a convenient way to avoid paying foreign transaction fees since you will not be using your card. However, this option comes with some drawbacks, such as not being able to shop online, and the risk of losing your cash to theft.
Your bank or financial institution is deducting a foreign transaction fee from your account because you are making purchases that either go through a foreign bank or are being made in a currency different from that of your card.
When charged, foreign transaction fees are normally not refundable. However, whether this fee will be refunded when you return an item bought from an overseas merchant depends on your card issuer and the terms and conditions of the debit or credit card.
Yes, but it depends on the card issuer. Some debit cards charge foreign transaction fees when you use them abroad, while some others do not.
Most credit cards can be used abroad. Read our comparison of travel credit cards to pick whichever offers the perks that are most attractive to you.
Capital One offers credit cards that have no foreign transaction fees. You can also get some payment cards with no foreign transaction fees from N26, bunq, and Starling Bank.
The Bottom Line
If you do not travel often and you rarely shop at international online stores, you might not see a reason to worry about foreign transaction fees. But if the reverse is the case for you, follow our tips for avoiding foreign transaction fees in this article. Do not think that 3% is a small fee to be concerned about because, when added up over time, you will have spent a significant amount of money on foreign transaction fees.