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Credit card fees are already hard to decipher. It gets even harder when different fees can apply to the same transaction. Case in point: foreign transaction fees and currency conversion fees. Cardholders may lump them together or refer to them interchangeably, but there is an important distinction.
The key difference between foreign transaction fees and currency conversion fees is that the first is a surcharge for using your credit card in a foreign country, while the second is a surcharge for having foreign purchases converted into dollars. Both are avoidable.
What’s a foreign transaction fee?
A foreign transaction fee is charged on credit card transactions outside the country where the card was issued. This could happen when you buy something while traveling abroad, or by placing an order with an foreign merchant. Not all cards charge this fee, but for those that do, it's usually around 3% of the purchase price.
Let’s do the math. Say you head to the U.K. and spend $3,000 on fish and chips. With a 3% foreign transaction fee, you’re looking at paying an extra $90. You could buy a lot more fish and chips with $90.
There are plenty of credit cards that don’t charge foreign transaction fees. Travel rewards credit cards usually don't charge this fee — but don’t just assume your travel card has no fee. Check the Schumer box on your credit card issuer’s site for fee information.
What’s a currency conversion fee?
Currency conversion fees are the result of Dynamic Currency Conversion, or DCC. This fee is charged by an overseas merchant to convert transactions into dollars (or whatever your home country's currency is). Say you’re a U.S. citizen visiting Spain, and you want to buy some souvenirs. The merchant may give you the option of seeing the bill in U.S. dollars rather than euros, so you don't have to try to do the conversion math in your own head.
The merchant is required to ask you before using DCC. If you say yes, the merchant will apply the conversion rate charged by its DCC service provider. If you say no, your credit card payment network — Visa, MasterCard, Discover or American Express — will do the conversion, and it will show up on your statement in dollars.
You're usually better off saying no to DCC, since DCC rates tend to be considerably worse than the rates charged by credit-card payment networks. A 2016 NerdWallet study of currency conversion rates found that the rates used by Visa and MasterCard, for example, were comparable to market rates — about as good as you can get.
Can I incur both fees on the same transaction?
Yes. Depending on your issuer and the merchant in question, you may be charged both foreign transaction and currency conversion fees, since the foreign transaction fee is charged based on where a purchase takes place, not how it's denominated. To avoid both, get a credit card with no foreign transaction fee and decline the DCC.
To understand how much you’re paying, take the time to run a currency conversion calculation on your first few transactions if you’re unfamiliar with the foreign currency. (Find Visa's calculator here and MasterCard's here.) You’ll eventually see your spending in U.S. dollars on your credit card statement, but it’s a good idea to know upfront what you’re paying instead of being surprised later on.