Foreign transaction fees vs. currency conversion fees: What are the differences?

Credit cards offer unmatched convenience for purchases anywhere in the world. However, using your card abroad can result in unexpected charges on your statement: foreign transaction fees and currency conversion fees. Understanding these fees and when they apply can help you avoid unnecessary expenses during international travel.

By reviewing your credit card policies before departure and using travel-focused cards while abroad, you can minimize or eliminate these extra costs.

What are foreign transaction fees?

A foreign transaction fee is a surcharge that your card issuer or bank applies when you make a purchase in a foreign country or with an international merchant online. While not all credit cards charge this fee, those that do typically add 1 to 3 percent to each transaction, which can add up quickly.

For example, if you charge a $1,000 hotel stay in another country and your card has a 2 percent foreign transaction fee, you’ll see an additional $20 charge on your statement. These fees can quickly accumulate during your travels and may push you over budget if you haven’t planned for them.

Additionally, foreign transaction fees typically don’t count toward credit card rewards like cash back, so it’s a net negative on your balance.

What are currency conversion fees?

Currency conversion fees, also called foreign currency exchange fees, come in two forms. Both involve charges for converting one currency to another during an international transaction.

Credit card processor currency conversion fees

When your credit card processor handles the currency conversion, they typically charge around 1 percent of the transaction amount. This fee appears on your statement after the purchase posts, so you won’t know the exact cost until later.

If your credit card doesn’t charge foreign transaction fees, the card issuer may be responsible for the currency conversion fee.

Dynamic currency conversion fees

Dynamic currency conversion (DCC) is a separate fee that merchants charge for converting purchases into your home currency. The merchant’s payment service provider usually sets these fees, which typically include a markup benefiting both the provider and the merchant.

Merchants must ask your permission before applying DCC. You’ll usually see this option on the payment terminal. If you choose to convert to U.S. dollars, you’ll pay a fee ranging from 3 to 12 percent of the transaction amount.

While DCC lets you immediately see the exact amount in dollars on your receipt, this convenience comes at a premium.

Comparing foreign transaction and currency conversion fees

Sometimes, card issuers combine foreign transaction fees and currency conversion fees into a single charge, labeled as a foreign transaction fee or international transaction fee. You might face both fees on a single purchase depending on your card issuer and the merchant.

Getting hit with both types of fees

So, are there cases where you’re hit with both fees at once? Unfortunately, yes. Consider this scenario: You’re dining at a restaurant in Spain, and your bill comes to 100 euros. When paying by credit card, the terminal asks if you want to pay in U.S. dollars or the local currency, euros.

Choosing U.S. dollars triggers dynamic currency conversion, which might seem convenient since you’ll see the exact in a familiar currency. However, with a 12 percent DCC fee, you’ll pay an extra 12 euros. Plus, if your card charges a foreign transaction fee (2 to 3 percent), your costs increase even further.

By paying in euros instead, you might only face your card’s standard currency conversion fee (1 percent) and foreign transaction fee (2 percent), adding just a few euros to your bill. Better yet, you could avoid these fees entirely with the right travel credit card.

The bottom line

Review your card’s policies and fee structures well before traveling to avoid unwanted charges. If your credit card does charge these fees, consider applying for a travel credit card or one that waives international purchase fees.

Frequently asked questions

• How can I minimize fees when I travel abroad?
  

  Check your credit card terms before traveling, and consider applying for a card without foreign transaction fees. Carry small amounts of local currency for minor purchases but rely primarily on credit cards for better security and fraud protection.

• Is it better to use a debit card, credit card or cash while traveling?
  

  Credit cards offer the strongest fraud protection and travel benefits, making them ideal for most travel purchases. Debit card fraud, however, can immediately impact your bank account and balance, and resolving debit card issues may take longer.

  While you should carry some cash for small transactions, avoid carrying large amounts. Keep at least one credit card available for hotel stays and car rentals, even if you plan to use cash sometimes.

  If you’re traveling internationally, avoiding exchanging currency in tourist areas or airports is a good rule of thumb. Although these are typically convenient locations, they usually have less favorable exchange rates. Instead, wait until arrival to withdraw money locally in your destination country.

• What happens if I use an ATM abroad?
  

  ATMs are another potential source of fees when traveling, but you can avoid unnecessary costs by sticking to ATMs that are part of your bank’s network or partner branches. It’s also a good idea to exchange currency before traveling to avoid unnecessary currency conversion fees and to limit your ATM usage when possible.

• What if my travel card doesn’t charge foreign transaction fees but still charges me an annual fee?
  

  While there are travel cards without annual fees, cards with annual fees often provide benefits that can outweigh the cost. For example, a travel credit card with a $95 annual fee could be offset by perks like free checked bags, airport lounge access or annual travel credits — but only if you travel frequently enough to use these benefits.