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What is a Foreign Transaction Fee?

When you plan an international vacation, you probably start saving money so you can buy the flights, Airbnbs, food, and activities. If you’re going to be using your credit card abroad to pay for any of those things — or to buy something from an online company based overseas before you go — you might also need to add “foreign transaction fee” to your travel budget.

Many credit card issuers charge a fee to use your credit card abroad, and these foreign transaction fees can add up quickly. Tack on currency conversion fees and your trip abroad can end up costing more than you budgeted for.

Fortunately, there are ways to avoid foreign transaction fees and currency conversion fees. Here’s everything you need to know.

When you’re charged a foreign transaction fee

A foreign transaction fee is a fee credit card issuers charge when you use your credit card internationally or when you make a purchase that passes through a foreign bank.

For example, if you use your card to buy dinner at a restaurant in Tokyo, you’ll pay a foreign transaction fee. You’ll also get slapped with a foreign transaction fee if you book a flight through Air New Zealand, even if you’re in your living room in Brooklyn when you purchase it.

How much a foreign transaction fee costs

To process these foreign transactions, the credit card issuer charges a percentage of the amount of the transaction. The exact amount varies by card, but most issuers charge around 3% of the transaction amount.

Although an extra $3 on a $100 train ticket might not seem like a lot, paying this fee again and again can make an already expensive trip even more expensive.

Plus, you’re not getting anything in return. If you spend $3,000 on bangers and mash on a card with a 3% foreign transaction fee while exploring Great Britain, that’s an extra $90 — and you could buy a lot more meat and potatoes with $90.

When you’re charged currency conversion fees

In addition to foreign transaction fees, you can end up paying currency conversion fees. A currency conversion fee is a fee overseas merchants charge when they convert transactions into dollars.

For example, if you use your credit card to buy a souvenir in Paris, the shop owner might give you the option of being charged in U.S. dollars rather than euros.

Sounds great, right? Now you don’t have to do the conversion math in your head and you know exactly how much you’re paying.

How much a currency conversion fee costs

The problem is you’re paying even more for this convenience. Thanks to dynamic currency conversion, not only can the merchant charge you a currency conversion fee — another 3% of the transaction amount usually — but they can also choose the exchange rate to convert the cost of the item. And, no surprise, it’s not usually in your favor.

Some travelers think that by saying yes to dynamic currency conversion and paying for a purchase in dollars they’ll avoid foreign transaction fees. Unfortunately, that’s not the case.

A foreign transaction fee charges you for using your card in a foreign country. A currency conversion fee charges you for converting foreign purchases into dollars. Because they charge for different things, you can end up paying both on a transaction.

Fortunately, there are ways to get around paying both of these fees.

How to avoid paying fees while traveling or shopping abroad

You can opt to use cash or local currency to avoid foreign transaction and currency conversion fees, but cash comes with its own set of risks. It’s never safe to carry a lot of cash while you travel, and if you need to take money out of a foreign ATM, you might get hit with another set of hefty fees anyway.

Luckily, there are plenty of credit and debit cards that don’t charge foreign transaction fees. If you frequently travel or shop abroad, make sure to use a card without foreign transaction fees. (Varo charges no foreign transaction fees.)

Card issuers are required to disclose the foreign transaction fee to you, so read your credit card or debit card agreement or call your card issuer to learn whether the company charges a foreign transaction fee.

To avoid the currency conversion fee, simply say no if the person behind the register asks if you want them to convert the bill into U.S. dollars. When you decline dynamic currency conversion, the conversion will be handled automatically by your credit card network, which tends to have a better currency exchange rate anyway.

Don’t let avoidable credit card fees take a bite out of your travel budget. By understanding foreign transaction fees and currency conversion fees, knowing the ins and outs of your credit card terms, and using a card with no foreign transaction fee in the local currency, you can save your travel funds for travel.

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