Credit Card Currency Conversion & Foreign Transaction Fees: What You Need to Know

Credit Card Currency Conversion & Foreign Transaction Fees: What You Need to Know

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One of the benefits of having a credit card is the ability to use it wherever you go – even if that means using it in another country. While you have to exchange your dollars for a foreign currency when using cash, a credit card can convert your currency automatically. However, credit card currency conversion can sometimes come loaded with fees, even if you have a card with no foreign transaction fees.

Currency Conversion Explained

When talking about currency conversion in the realm of credit cards, there are two separate things to talk about: dynamic currency conversion (DCC) and currency conversion performed by the card itself. The former refers to a merchant converting a bill from their local currency to USD before charging your credit card. The other type of currency conversion happens after you swipe a card, and your network determines the exchange rate that will apply to your bill. While currency conversion performed by your card network is generally fair, you should never opt in for dynamic currency conversion.

Dynamic Currency Conversion & Why You Should Avoid It

You run into dynamic currency conversion whenever you go to make a purchase abroad and the merchant asks whether you’d like to be billed using your home currency. You will typically run into these scenarios when visiting areas that tend to get a lot of tourists. Dynamic currency conversion is generally considered to be a very bad deal for consumers, since merchants and retailers are incentivized to pick exchange rates that favor them. Additionally, some merchants will tack on additional charges on top for the service that further drive up the cost of DCC even further.

While people are generally asked for their preferred method of billing, that may not always be the case. When using your credit card abroad, you should always check your bill to make sure the merchant didn’t convert your currency dynamically without asking for your permissions first. This action is not always malevolent. Some people may be misinformed and simply be trying to help you by converting currencies on their own.

You have the right to decline DCCs, and no foreign merchant may force you to pay in your home currency. If this happens to you, know that you have several options to dispute the charges. First, you can contact your card issuer and explain the situation. If they are unable to help, you can always contact your card network (Visa, Mastercard, Discover, or American Express). Their compliance division will contact the merchant and work with them to resolve the issue.

Foreign Transaction Fees & Currency Conversion

Some consumers erroneously believe dynamic currency conversion will protect them from the foreign transaction fees, which are typically charged by cards when used abroad. The foreign transaction fee, which applies to most credit cards on the market, is around 2.7%-3%. The language in most credit card agreements states that the fee will be assessed for foreign transactions. The disclosures make no mention of the currency used. Therefore, if your purchase passes through a foreign bank, the transaction will likely be flagged as a foreign.

Some travel credit cards don’t charge their users any foreign transaction fees, making them well suited for international travel. However, you should still make sure to pay for all your purchases using the local currency, even if you use one of these cards. Otherwise, you may end up paying a markup regardless.

You can find your card’s foreign transaction fee by navigating to the ‘rates & fees’ section on the card’s website. These disclosures are standardized by law, making them fairly straightforward and easy to read. If there are any foreign transaction fees, they will be listed under the general ‘Fees’ section that can be found right below the interest rates.

foreign-transaction-fees
Foreign Transaction Fees

Is Credit Card Currency Conversion Fair?

Generally speaking, the exchange rate that is picked by your card network -- Visa, Mastercard, Discover or Amex -- is fair and in-line with what most exchange websites report. To test this, we decided to take a sample GBP exchange rate, on April 7th, 2017, from two of the biggest card networks. We then compared this data against two non-credit card sources, a third party website and Travelex. The third party site served as our control, and we judged the other exchanged rates on its basis.

Company

4/7/2017 GBP-to-USD Exchange Rate
Markup
Mastercard1.251%
VISA1.251%
Third-Party Website1.24N/A
Travelex1.3711%

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Mastercard and Visa are the only two networks that post exchange rates they use to their website. These websites can give you historical data up to the present day. You can use this information to compare against currency exchange counters when visiting another country. If your credit card network is posting lower exchange rates on their website, and you have no foreign transaction fees, use it instead of cash.

In certain cases, the currency conversion rates on your networks can be so good, it may make sense to pay the foreign transaction fee. If you look at the example above, Travelex has an exchange rate that is almost 10% worse than Visa and Mastercard, on that particular day. Therefore, even if you pay a foreign transaction fee, you'd be coming out ahead.

Yowana is a former product analyst at ValuePenguin, specializing in credit cards, rewards programs and travel. He previously covered mortgages, banking and insurance for the website. Yowana graduated from Columbia University with a B.A. in Political Science.

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