When you use your credit or debit card in a foreign country, or online with a foreign merchant, your card issuer, usually a bank, may charge a foreign transaction fee of 2% to 3% of the purchase price. At the same time, the credit card payment processor, such as Visa or Mastercard, may tack on an additional 1% currency conversion fee. Here is how these fees work and what you can do to avoid or at least lessen them.

What Is a Foreign Transaction Fee?

Many, but not all, credit and debit card issuers and ATM networks charge a per-transaction fee on purchases or withdrawals made overseas or when ordering online with a foreign merchant. The fee varies but typically runs between 2% and 3% of the dollar amount of the purchase or withdrawal. For example, suppose you travel to Paris, spend the equivalent of $1,000 in a department store, and charge the purchase to your credit card or pay for it with your debit card. With a 3% foreign transaction fee, you will notice a $30 surcharge when you receive your statement. That's the result of a foreign transaction fee imposed by the card issuer. Alternatively, suppose you run out of cash and decide to use an ATM that charges a 3% transaction fee to obtain $1,000 (dollar equivalent) in euros. The actual cost to you will be $1,030 for $1,000 worth of euros. By the way, sometimes the foreign transaction fee is called a foreign exchange fee. At one time it was called a currency conversion fee, but that fee is now something completely different (see below).

What Is a Currency Conversion Fee?

A currency conversion fee is an additional charge for converting a transaction from one currency to another, such as from the local currency of the country you are visiting to U.S. dollars. There are two types of currency conversion fees: those charged by a credit or debit card payment processor or ATM network and those charged through a process known as dynamic currency conversion (DCC).

When the conversion is done by your card's payment processor, the charge is typically 1% of the purchase amount. When the conversion happens through DCC, the charge is usually more—up to 12%, according to one study cited by the European Consumer Organisation. It calls DCC "a scam."

Another difference between the two types of currency conversion has to do with how soon you will know the cost of the conversion. When your card's payment processor levies the charge, you will not know the true cost of your purchase in dollars until your statement arrives or posts online. (You can get around this by using a currency exchange rate app, such as the Xe Currency Converter, and adding your card's foreign transaction fee to the purchase price.) With DCC, you will see the difference immediately on your receipt or on a terminal at the point of sale. As DCC usually costs more, it's up to you to decide if the potentially whopping extra charge is worth knowing the cost immediately. Keep in mind that DCC does not replace your card's foreign transaction fee. You will still pay that fee in addition to the DCC fee. The merchant cannot simply use DCC without your consent. You have the right to refuse.

How the Fees Can Add Up

Here's where it gets a little complicated: Often the foreign transaction fee you pay will have the currency conversion fee built in. For example, your total fee might be 3%, with 1% consisting of the currency conversion fee and 2% accounting for the transaction fee.

Visa and MasterCard charge a 1% currency conversion fee to the card issuer. The issuer has the option to pass along that fee, along with any additional fees it decides to add, and call the whole thing a foreign transaction fee. Some card issuers, especially those that offer cards geared toward frequent travelers, charge no fee at all.

The table below shows the main types of foreign credit and debit card fees, who charges them, and how much they typically are.

Types of Foreign Credit Card Fees
Type of Fee	Imposed On	Imposed By	Rate
Foreign Transaction	Overseas credit card transactions	Issuer	2% to 3%
Currency Conversion	Overseas currency conversion	Processor	1%
Dynamic Currency Conversion	Overseas point-of-sale conversion	Merchant	3% to 12%

Avoiding (or Minimizing) These Fees

Whether it's a foreign transaction or currency conversion fee, it's always better to pay no fee. Here are some ways to avoid or minimize fees when traveling and spending abroad:

• Check your card's fees under "terms and conditions" and, if appropriate, apply for a card with zero foreign transaction fees before you travel.
• Get some cash before you leave home to minimize trips to an ATM and the resulting fees.
• Check whether your bank is part of a "no fee" or "low cost" global ATM network.
• Beware of deceptive ATMs and terminals that try to disguise DCC.
• Always pay in local currency with your cards and decline DCC if a merchant offers it to you.
• You'll also avoid fees if you pay in cash, although you may not want to carry a lot of it for security reasons.

The Bottom Line

If you're heading overseas (or across the U.S. border) for travel, you can make your money go a lot further if you avoid foreign transaction fees whenever possible. Spend the money on fun instead.