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One of the great new ways that credit card companies generated revenue, which began several years back, was to charge a “foreign transaction fee.” This was a fee — usually 3% — that the credit card company hit you with if you made a purchase in a foreign currency, or that involved a foreign bank.
What? Why? First, you need to understand about currency exchange.
Why you may get dinged
One of the great secrets of currency exchange is that it’s almost never free. Some person or entity somewhere has to handle the actual exchange, and they charge a fee for it because there’s a cost to exchanging currency. The closer a currency exchange entity is to the real-time “spot” market, the less it’ll be charged for the exchange.
There are many entities in between the spot market and you, the consumer. There are international money-center banks, brokers, the banks that issue credit cards, and the payment processors (Visa, MasterCard, etc.). The more volume that gets exchanged in any one transaction, the less the cost.
I’m sorry to tell you that you are at the bottom of the food chain. That means you get hit with the 3% fee, and everyone above you takes a little piece on up to the spot market. That’s why you pay a fee.
So, you’re pretty much assured that if 1) your card permits foreign transaction fees, and 2) that you are abroad and use that card, and 3) you are using local currency, it likely means you’ll get dinged.
A way to avoid the fee?
But thanks to the wonderful world of the Internet, an interesting conundrum has arisen. If you use a U.S.-based hotel booking website, but use it to book an international hotel, do you get charged the foreign transaction fee?
The answer is “it depends.” It is entirely up to your credit card company. The hotel booking websites either don’t mention it at all, or offer a disclaimer. For example, at Expedia.com, they say: “If you are making a booking from outside of the United States on a U.S. credit card, your bank may convert the payment amount to your local currency and charge you a conversion fee … In addition, a foreign transaction fee may be assessed if the bank that issued your credit card is located outside of the United States. Booking international travel may be considered to be an international transaction by the bank or card company, since Expedia, Inc. may pass on your payment to an international travel supplier.”
Steps to take before booking
Regardless, a good step is to always call your credit card company before booking any international travel —air, cruise, hotel, rail, rental car, you name it. The other option is to search through NerdWallet’s list of cards that don’t charge a foreign transaction fee. Oh, and one other thing: You can find some nice tips on using your card overseas at a few websites like American Express — even if they won’t tell you about booking hotels.