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Foreign Transaction vs. Currency Conversion Fees: What's the Difference

Frequent travelers know that making a purchase overseas can cost more than the price tag indicates. Unless you have one of the best travel credit cards, you usually end up facing a couple of fees when traveling. These include both foreign transaction fees and currency conversion fees. While these fees come up around the same transactions, they actually have to do with different components of the transaction. Luckily, you can avoid both.

What Is a Foreign Transaction Fee?

Sometimes referred to as FX fees, you’ll see foreign transaction fees whenever you buy something outside of the country that issued your credit card. The exact amount varies by card, but most issuers charge a foreign transaction fee of around 3% of the transaction amount.

These fees appear on your bill anytime a credit charge passes through a foreign bank or is conducted in a currency other than U.S. dollars (or your home currency). It can even pop up when you buy from an overseas merchant online. Just because you completed the transaction in USD, it may have gone through a foreign bank at some point.

You see this fee because banks need to convert the money you spent into U.S. dollars so they can charge your account. The foreign transaction fee covers that cost. These fees also help banks avoid big losses from fraudulent international transactions. Any time an issuer converts money, they take on a risk.

What Is a Currency Conversion Fee?

Foreign Transaction vs. Currency Conversion Fees: What's the Difference

In addition to foreign transaction fees, you can end up facing a currency conversion fee. This fee comes as a result of dynamic currency conversion (DDC). This essentially charges you for displaying a transaction amount in U.S. dollars. Typically, the merchant will ask you whether you want to use DCC. You have the option of saying yes or no. Saying yes allows you to see the amount in USD immediately, rather than waiting for your credit card statement. However, if you say no, you easily avoid the conversion fee.

Currency conversion fees can apply to any foreign purchases made with credit cards, debit cards and ATM withdrawals. True, it’s helpful to see the converted cost without doing the math yourself. But this small convenience can cost you another 3% of the transaction amount usually. Even further, merchants often convert your purchases at unfavorable exchange rates, costing you even more.

Foreign Transaction vs. Currency Conversion Fees

Put simply, a foreign transaction fee charges you for using your card in a foreign country while currency conversion fees charge for converting foreign purchases into dollars. Because they charge for different things, you can definitely end up paying both on a transaction. Whether you pay both and the exact amounts of each fee will depend on the merchant, your card and yourself.

How to Avoid Foreign Transaction and Currency Conversion Fees

Foreign Transaction vs. Currency Conversion Fees: What's the Difference

If you’re a frequent traveler you may already be in the loop about how to avoid these fees. For starters, avoiding a currency conversion fee is as simple as saying no to the merchant when they ask if you want to use DCC. There’s almost no point in getting your transaction amount exactly in USD at checkout. Plus, you can just let your card’s network convert the currency at a more favorable rate instead.

Avoiding a foreign transaction fee involves a little more work, namely getting a credit card without foreign transaction fees. This will help you spend with more ease when traveling abroad. Just make sure you’re not getting a credit card for that perk alone. It’ll be more worthwhile to have a card that benefits you in other ways, as well, like cashback rewards.

The Takeaway

You can find out what kind of foreign transaction fees, if any, your credit card carries. This information is typically in the “Fees” section of your card agreement. You can always give your credit card issuer a call, as well. While these fees aren’t too high, it’s best to avoid them whenever you can, otherwise they can pile up. Luckily, you can easily avoid a currency conversion fee by simply declining the merchant’s offer.

Tips on Using a Credit Card Responsibly 

  • When you have a credit card, it’s important to know about the fees and penalties it comes with. Like foreign transaction fees, you can face fees for things like balance transfers and foreign ATM usage. Why pay a fee when you don’t have to? Keep those fees in mind so you can avoid them and save yourself some money.
  • One of the top pieces of advice when it comes to credit cards is to always pay your bills on time and in full. Paying on time helps you avoid yet another fee for late payments. You also avoid getting hit with a high penalty APR, which won’t help if you’re already behind on payments. Plus, paying a bill in full will ensure you don’t carry over a balance that can then accrue interest, throwing you into debt.

Update: Have more financial questions? SmartAsset can help. So many people reached out to us looking for tax and long-term financial planning help, we started our own matching service to help you find a financial advisor. The SmartAdvisor matching tool can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

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Liz Smith Liz Smith is a graduate of New York University and has been passionate about helping people make better financial decisions since her college days. Liz has been writing for SmartAsset for more than four years. Her areas of expertise include retirement, credit cards and savings. She also focuses on all money issues for millennials. Liz's articles have been featured across the web, including on AOL Finance, Business Insider and WNBC. The biggest personal finance mistake she sees people making: not contributing to retirement early in their careers.
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