Foreign Transaction Fee: Definition, How It Works, and Example

What Is a Foreign Transaction Fee?

A foreign transaction fee is a charge assessed by a financial institution to a consumer who uses an electronic payment card to make a purchase in a foreign currency. Foreign transaction fees usually apply to card purchases made in foreign countries while traveling, but they can also apply to purchases made online from your home country where the vendor is foreign and processes the transaction in its local currency.

Foreign transaction fees are also called “foreign purchase transaction fees” or “foreign currency transaction fees.”

Understanding Foreign Transaction Fees

Many banks and credit card issuers will charge domestic customers with foreign transaction fees if they make a transaction abroad, or online from an overseas website. Originally, these fees were intended to defray the costs to banks for settling and clearing these international payments and minimizing their exchange rate risk between currencies.

Today, however, many of these concerns have been alleviated through the modernization of the global banking system. Still, several cards available today do carry foreign transaction fees. If you do plan to travel often, it is worth researching the best credit cards to find those with the most favorable fees.

Foreign transaction fees are an important consideration when paying for a purchase in a foreign currency with any type of electronic payment card. Consumers will encounter foreign transaction fees from most issuers of both debit and credit cards.

Withdrawals from foreign ATMs may also incur a foreign transaction fee in addition to any fees imposed directly by the ATM machine itself. One thing to consider is whether your card will reimburse you for foreign ATM fees.

How a Foreign Transaction Fee Works

Foreign transaction fees are typically around 2-3% of each transaction in U.S. dollars. This fee might consist of a 1% fee charged by the payment processor, such as MasterCard or Visa, plus another 2% fee charged by the card issuer, such as Bank of America or Wells Fargo.

While 3% may not sound like a whole lot, these fees can really add up over the course of an extended trip. For every $1,000 you spend, you’ll be paying $30 in foreign transaction fees.

Some foreign merchants will offer consumers the option of paying in their own home currency, which is called “dynamic currency conversion (DCC)” at the point of sale. However, it is usually more cost-effective to actually pay in the foreign currency because DCC rates do not tend to favor the consumer.

No Foreign Transaction Fee Cards

If a card charges a foreign transaction fee, it will be listed in the card’s terms and conditions. Some cards do not charge any foreign transaction fees. MasterCard, for instance, lists several credit cards with no foreign transaction fees on its website, from a number of bank issuers including Citibank and Capital One.

If you are planning a trip abroad and all of your existing cards do charge foreign transaction fees, it can be a good idea to apply for a new account that has no foreign transaction fees a couple of months before your trip.

Make sure to apply far enough in advance to allow for approval, account setup, and the distribution of your new card in the mail. Also, it is a good idea to let the issuer know about your travel plans ahead of time so they will not flag your foreign purchases as fraudulent activity and freeze your account by mistake.

Special Considerations

Travel experts often recommend using an electronic payment card for all your purchases when traveling abroad because the exchange rate you get from your card issuer will probably be more favorable than the exchange rate you would get from a currency exchange kiosk.

In addition, you avoid the risk of losing cash or having it stolen and if your credit card is lost or stolen, you won’t be responsible for unauthorized transactions.

The Bottom Line

A foreign transaction fee is a small charge by most credit cards for customers who make transactions overseas. This is in addition to the currency conversion fees that are charged for making purchases in another country's currency. Not all credit and debit cards have a foreign transaction fee, but it is important to understand these costs before making any major trips abroad.