What Is a Credit Card Foreign Transaction Fee (and How to Avoid It)

Nov 10, 2016 | Be First to Comment!

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There is no credit card fee that I've found to be more misunderstood than the so-called foreign transaction fee. (And few that are as completely unnecessary.) In fact, the more I've learned about this fee, the more adamant I've become informing credit card users about it. Why? To help them to avoid it.

What are foreign transaction fees?

A foreign transaction fee is charge imposed on any transaction that is processed outside of the United States.

Note the part of the definition that says, "any transaction that is processed outside of the United States." This means you can be charged a foreign transaction fee even from the comfort of your own home. Think about when you're buying something online. If you make the purchase from a foreign company, you could be charged this fee.

This is not a commonly understood fact. Most people think of currency conversion charges when they think of foreign transaction fees. But these two things are not the same. You pay a currency conversion charge when you convert your money to another country's money. But a foreign transaction fee, charged at the time of a purchase, could even come up if the foreign country you're in accepts US currency.

Put simply, if you buy something outside of the U.S. (online or in person), your credit card issuer could charge a foreign transaction fee.

How Much Do these Fees Cost?

Most credit card issuers charge a 3% foreign transaction fee. That's 3% of the purchase you made, so the amount of the fee will vary. This 3% may not sound like a lot of money, but it can add up quickly.

Imagine if you're traveling to another country. In one day you may buy breakfast, lunch, and dinner out. Then you might grab a cup of coffee or some drinks. Add in a museum ticket or some other cultural event. In one day, that's 5 fees. And that doesn't even include transportation or souvenirs.

Furthermore, this 3% fee is going to be greater than the value of rewards you're earning on your credit card. Whether it's cash back, points, or miles, you're not likely earning up to this 3% value.

So, if you have a credit card that offers 1.5% cash back, you might actually be paying 1.5% thanks to this 3% fee! And that's every single time you use your card on a foreign transaction.

Does the Cost Make Any Sense?

When a bank imposes a 3% charge on everything you buy, it must be because it incurs serious costs for running these foreign transactions, right? You might picture a credit card issuer having to open an offices in exotic places all over the world like Burkina Faso and Papua New Guinea just to process your foreign credit card transactions.

In reality, the process is much more mundane than that. It doesn't cost credit card issuers any more to process transactions outside of the U.S. than it does at home. Banks use computers to daily process billions between U.S. and foreign currencies. And they do so at something called interbank rates. Interbank rates are the most favorable exchange rates you can get. So there isn't a significant cost of doing this conversion. In the end, nobody has to go to Nepal to process your credit card bill for lunch in Katmandu.

If you're still convinced that there must be some rationale behind these charges, consider this. These same banks charge their customers from other countries additional fees to process transactions here in the US.! Yet somehow, they still manage to make healthy profits from their credit cards that don't have foreign transaction fees.

By now, you might be thinking that these fees are an outrageous scam that's worthy of a lawsuit. You would be correct. There have been numerous court cases and lawsuits questioning the concept of foreign transaction fees. In fact, one judge examining the cost of credit card foreign transactions wrote that Visa and MasterCard “merely act as a clearinghouse, performing arithmetical calculations at insignificant cost.” Not exactly work that justifies the cost of this fee.

How Will You Know if Your Card Issuer Charges Foreign Transaction Fees?

Here's the good news. There are a growing number of credit cards that no longer have foreign transaction fees. Most of the time they're premium travel rewards cards, but there are some no annual fee credit card options as well. In fact, some card issuers are eliminating foreign transaction fees from all their cards. Before I leave the country, I always remove the cards from my wallet that have a foreign transaction fee.

So how can you tell if your card has foreign transaction fees? It's easy to do if the card you have is available to new applicants. Go to your issuer's website and click on "terms and conditions" or "rates and fees." All credit card issuers are required to list each card's interest rates and fees. Find the fees for your card and look to see if foreign transaction fees are on the list.

This isn't so easy to do online if your card isn't available to new applicants anymore. In that case, call the customer service number on the back of your card. Then simply ask the representative if this card has a foreign transaction fee.

Best Credit Cards with No Foreign Transaction Fees

There's no reason you have to get a credit card that doesn't offer anything other than the lack of foreign transaction fees. Below is a list of the best cards for foreign travel that don't charge useless foreign transaction fees.

Chase Sapphire Preferred® Card

Chase Sapphire Preferred® Card is one of the leading travel rewards cards and a favorite among award travel enthusiasts. It offers double points on travel and dining, and one point per dollar spent on all other purchases. Points are earned in Chase's Ultimate Rewards® program. This program offers cash back, gift cards, merchandise or travel reservations. But its best feature is the ability to transfer points to frequent flyer miles or hotel rewards.

There's a signup bonus for new applicants too. You can earn 50,000 bonus points if you spend $4,000 on new purchases within your first three months. Like many premium travel rewards, this card doesn't charge foreign transaction fees. It does have a $95 annual fee - but it's waived the first year.

BankAmericard Travel Rewards® Credit Card

Not everyone needs a premium travel rewards card, and its accompanying annual fee. Just want a inexpensive card for travel outside of the U.S.? Try BankAmericard Travel Rewards® Credit Card. This card offers strong rewards with no pesky annual fee or foreign transaction fees.

This card also has a signup bonus. You could earn 20,000 bonus points if you make $1,000 in purchases within your first 90 days. You also earn 1.5 points per dollar spent on all purchases, with no limits. Points are worth one cent each. They're redeemed as statement credits. And they can be used for travel purchases including airfare, hotels, car rentals, and vacation packages. You also get 12 months of 0% APR introductory financing on new purchases. Finally, Bank of America checking and savings account holders receive another 10% customer relationship bonus on the points they earn. There is no annual fee for this card.

Discover it®

Discover it® offers competitive cash back rates and has a great reputation for customer service. Discover it® cardholders receive 5% cash back on up to $1,500 in spending each quarter on featured categories of purchases. They then earn 1% cash back on everything else. And at the end of your first year, you also receive a bonus equal to all the rewards you've earned. This card also offers 12 months of 0% APR financing on purchases and balance transfers (the latter with a 3% balance transfer fee).

Discover offers various other benefits to cardholders. These include purchase protection, extended warranty coverage, price protection, and a return guarantee policy. Furthermore, Discover has ranked the highest in J.D. Power's U.S. Credit Card Satisfaction Study for three years in a row. And its phones are answered by 100% US-based customer service representatives.

Unfortunately, Discover isn't accepted in every country. If you want or have a Discover card, use their online tool to find out which countries you can use it in. There is no annual fee for this card, no penalty interest rate, and no foreign transaction fees.

What Should You Do on Your Next Overseas Trip?

If you haven't figured it out yet, I hate foreign transaction fees. I don't mind paying for the services I need, and I'm even willing to pay a lot for something that's valuable. But I just can't stand paying a fee for something when I receive nothing in return. And I despise being charged a percentage of everything I buy.

But is this worth getting a specific credit card just for traveling overseas? If you regularly travel abroad, keep at least one card with no foreign transaction fees. If you're planning for an extended trip abroad, you could avoid wasting your money on this fee by having just a single credit card without it. But if my only foreign travel plans were only a day trip to Canada or Mexico, I wouldn't bother to get a new credit card just for a day of sightseeing.

Are there other options besides using a credit card? Sure. You could pay cash for everything. But, you'd likely incur ATM fees or foreign conversion fees. This isn't much better than the foreign transaction fees charged by your credit card. And besides, many debit cards also have foreign transaction fees.

More importantly, credit cards are by far the safest and most convenient method of payment for international travel. I never carry much cash because I'm paranoid about being pickpocketed or robbed in some other way. I also know that it's almost essential that you have a major credit card in order to rent a car or check into a hotel. Plus, credit cards offer other travel benefits such as rental car insurance and global assistance hotlines.

Finally, the right travel rewards credit card with no foreign transaction fees may also be ideal for your daily use at home. Pick one without the foreign transaction fees to keep your rewards high and your spending on useless fees low. This is the first step in becoming a real travel pro.

Airline Credit Cards Compared

Airline Credit Cards Annual Fee Free Checked Bags Lounge Access Companion Ticket Foreign Transaction Fee Priority Boarding Other
Gold Delta SkyMiles® Credit Card from American Express $95 First checked bag waived for you and up to 8 guests Discounted single-visit passes of $29 each for you and two guests None None Yes In-flight discounts
Platinum Delta SkyMiles® Credit Card $195 First checked bag waived for you and up to 8 guests Discounted single-visit passes of $29 each for you and two guests Yes, one domestic economy class ticket per year None Yes In-flight discounts and easier to obtain elite status
Delta Reserve® Credit Card from American Express $450 First checked bag waived for you and up to 8 guests Free membership for you and discounted pass for 2 guests Yes, one domestic First or Main Cabin class ticket per year None Yes Upgrade priority, in-flight discounts, easier to obtain elite status, and priority check-in
Alaska Airlines Visa Signature® Credit Card $75 First checked bag waived for you and up to 6 guests None Yes, one economy class ticket per year None No -
JetBlue MasterCard® $0 None None None None No In-flight discounts
JetBlue Plus MasterCard® $99 First checked bag waived for you and up to 3 guests None None None No In-flight discounts, easeier to obtain elite status, and $100 annual statement credit toward Jetblue Getaways package
British Airways Visa Signature® Card $95 None None Yes, when you make $30,000 in annual purchases None None -
Southwest Airlines Rapid Rewards® Plus Credit Card $69 (All checked bags are already free) None None 3% of each transaction No Anniversary points bonus
Southwest Rapid Rewards® Premier Credit Card $99 (All checked bags are already free) None None None No Anniversary points bonus
United MileagePlus® Explorer Card $95 First checked bag waived for you and 1 guest Two free one-time United Club passes None None Yes -
United MileagePlus® Club Card $450 First and second checked bag waived for you and one guest Free membership for you and access for 2 guests None None Yes Priority check-in, priority security lanes, priority baggage handling, and Hyatt Platinum status
Citi® / AAdvantage® Gold MasterCard® $50 None None None 3% of each transaction No In-flight discounts
Citi® AAdvantage® Platinum Select® MasterCard® $95 First checked bag waived for you and 4 guests None None None Yes In-flight discounts
Citi® AAdvantage® Executive World Elite™ MasterCard® $450 First checked bag waived for you and up to 8 guests Free membership for you and access for 2 guests None None Yes Statement credit for Global Entry/TSA Precheck, in-flight savings, priority check-in, and priority airport screening

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