What is a Foreign Transaction Fee and How Can You Avoid It?

Foreign transaction fees are irritating little charges that every traveler has faced, and most credit card users have questioned. They are the bane of a frequent flyer’s life and if not managed carefully, could result in some serious charges. But what are these charges, why do they exist, what’s the average fee, and how can you avoid them?

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What is a Foreign Transaction Fee?

A foreign transaction fee is a surcharge levied every time you make a payment in a foreign currency or transfer money through a foreign bank. These fees are charged by credit card networks and issuers, often totaling around 3%.

For example, imagine that you’re on holiday in the United Kingdom, where all transactions occur in Pound Sterling. You go out for a meal and use your credit card to pay a bill of £150. Your credit card issuer first converts this sum into US Dollars and then charges a foreign transaction fee, after which the network (Visa, MasterCard, American Express) will do the same.

If we assume that £150 equates to exactly $200, this will show on your credit card statement first followed by a separate foreign transaction fee of $6.

When Will You Pay Foreign Transaction Fees?

If you’re moving money from a US bank account to an international account in a different currency, there’s a good chance you will be hit with foreign transaction fees and may also be charged additional transfer fees. More commonly, these fees are charged every time you make a payment in a foreign currency.

Many years ago, foreign transaction fees were limited to purchases made in other currencies, but they are now charged for online purchases as well. If the site you’re using is based in another country, there’s a good chance you’ll face these charges.

It isn’t always easy to know in advance whether these fees will be charged or not. Many foreign based sites use software that automatically detects your location and changes the currency as soon as you visit. To you, it seems like everything is listed in dollars, but you may actually be paying in a foreign currency.

Other Issues that American Travelers Face 

Foreign transaction fees aren’t the only issue you will encounter when trying to use American reward credit cards abroad. If we return to the previous example of a holiday in the UK, you may discover that the restaurant doesn’t accept your credit card at all.

In the UK, as in the US, Visa and MasterCard are the two most common credit card networks and are accepted anywhere you can use a credit or debit card. However, while Discover is the third most common network in the US, it’s all but non-existent in the UK. 

Discover has claimed that the card has “moderate” acceptance in the UK, but this is a generous description and unless you’re shopping in locations that tailor for many tourists and American tourists in particular, it likely won’t be accepted.

There are similar issues with American Express, albeit to a lesser extent. AMEX is the third most common provider in the UK, but finding a retailer that actually accepts this card is very hit and miss.

Do Foreign Transaction Fees Count Towards Credit Card Rewards?

Foreign transaction fees, and all other bank and credit card fees, do not count towards your rewards total but the initial charge does. If we return to the previous example of a $200 restaurant payment, you will earn reward points on that $200 but not on the additional $6 that you pay in fees.

How to Avoid Foreign Transaction Fees

The easiest way to avoid foreign transaction fees is to use a credit card that doesn’t charge them. Some premium cards and reward cards will absorb the fee charged for these transactions, which means you can take your credit card with you when you travel and don’t have to worry about extra charges.

This is key, because simply converting your dollars to your target currency isn’t the best way to avoid foreign transaction fees. A currency conversion will come with its own fees and it’s also very risky to carry large sums of cash with you when you’re on vacation. 

Credit Cards Without Foreign Transaction Fees

All credit card offers are required to clearly state a host of basic features, including interest rates, reward schemes, and annual fees. However, you may need to do a little digging to learn about foreign transaction fees. These fees can be found in the credit card’s terms and conditions, which should be listed in full on the provider’s website.

To get you started, here are a few credit cards that don’t charge foreign transaction fees:

  1. Bank of America Travel Rewards Card: A high-reward and low-fee credit card backed by the Bank of America.
  2. Capital One: All Capital One cards are free of foreign transaction fees, including their reward cards, such as the Venture card.
  3. Chase Sapphire Preferred: A premium rewards card aimed at big spenders. There is an annual fee, but not foreign transaction fees.
  4. Citi Prestige: One of several Citi cards that don’t charge foreign transaction fees, and the best one in terms of rewards. 
  5. Discover It: A solid all-round credit card with no foreign transaction fees. However, as noted above, the Discover network is rare outside of the United States.
  6. Wells Fargo Propel World: An American Express credit card with good rewards and low fees, including no foreign transaction fees.

Summary: One of Many Fees

Foreign transaction fees are just some of the many fees you could be paying every month. Credit cards work on a system of rewards and penalties; you’re rewarded when you make qualifying purchases and penalized when you make payments in foreign currencies and in casinos, and when you use your card to withdraw cash.

Many of these fees are fixed as a percentage of your total spend, but some also charge interest and you will pay this even if you clear your balance in full every month. To avoid being hit with these fees, pay attention to the terms and conditions and look for cards that won’t punish you for the things you do regularly.