Foreign Transaction Fee vs. Currency Conversion Fee: Know the Difference

Credit card fees are complicated, and when it comes to currency conversion fees and foreign transaction fees, the picture gets even more complex. That’s because both fees can apply to the same transaction.

When you make a purchase (or withdraw cash from an ATM) with your U.S. issued credit or debit card in a foreign country or online with a company based in a foreign country, the 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, typically Visa, MasterCard, or American Express, will tack on an additional 1% of the purchase price to convert your purchase from the foreign currency to U.S. dollars. Whether you pay these fees depends on the credit card or ATM network you use.

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% to 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, when you receive your statement online or in the mail, you will notice a $30 surcharge. That’s the result of a foreign transaction fee imposed by the credit or debit 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?

There are two types of currency conversion fees typically levied by a merchant when making a purchase overseas—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).

A currency conversion fee is an additional charge for converting a transaction from one currency to another—typically from the local currency of the country you are visiting to U.S. dollars. When the conversion is done by your credit card payment processor (usually Visa, MasterCard, or American Express), the charge is typically 1% of the purchase amount in dollars. When the conversion happens through DCC, the charge is usually more—up to 12%, according to one European study.

The difference between the two types of currency conversion fees has to do with how soon you will know the cost of the conversion. When your credit card 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 XE Currency, and adding your card’s foreign transaction fee.) 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 extra charge is worth knowing the cost immediately. Keep in mind that DCC does not replace your credit card’s foreign transaction fee. You will pay that fee in addition to the DCC fee. The merchant cannot simply use DCC without your consent. You have the right to refuse.

Putting It Together

Often the foreign transaction fee you pay includes the currency conversion fee. 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 travel cards, charge no fee at all. American Express, which does not use Visa or MasterCard to process payments, charges a 2.7% fee on some cards and waives the fee on others. 

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

Avoiding 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 “no fee” card before you travel.
• Get some cash before you leave home to minimize trips to an ATM.
• 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 and avoid DCC.

Get a currency exchange rate app, such as XE Currency, so you know the market exchange rate at all times.