When you travel abroad or make a purchase in another currency, it’s important to pay attention to foreign transaction fees to avoid unplanned costs.

What are foreign transaction fees?

When you make a purchase using a foreign currency, your credit card or debit card issuer might charge you a fee to convert the amount to your currency. The percentage fee you pay varies by issuer and card product.

True conversion rates change daily, so the total dollar amount you might pay one day could vary the next day. This won’t be obvious at the point of sale, but rather when you check your statement after the charge posts to your account.

These fees, if they exist on your credit cards, range from 1% to 3% on the purchase price of what you’re buying.

What is Dynamic Currency Conversion?

Dynamic Currency Conversion (DCC) is the option to make a purchase in your home currency instead of the local currency. Some might say there is convenience in paying in your home currency and there may be a better understanding of what things cost.

But that’s where the benefits stop. DCC doesn’t actually show you the current exchange rate at the point of sale. Instead, there typically is an extra pad in the exchange rate listed, potentially to account for their administrative expense to convert the currency for you.

If you make a charge in a foreign country in your home currency, you might still be assessed a foreign transaction fee. This varies by bank, so be sure to take a look at the terms. For instance, Chase even explicitly states converting to your home currency “won’t take the place of paying a foreign transaction fee”. However, in practice, the DCC fee could be higher than the foreign transaction fee charged by your card, rendering this option moot.

In other words, DCC should be viewed as an additional expense you didn’t plan on when making a purchase, and you should always decline when given the option.

How to avoid foreign transaction fees

Credit cards

The best way to avoid a foreign transaction fee is to use a credit card that charges no fees. This typically comes for cards that specialize in travel, such as the Chase Sapphire Preferred (refer-a-friend link) or the Venture X (refer-a-friend link).

While it’s great to have a credit card that doesn’t assess fees, note that many travel-focused credit cards do charge an annual fee. However, that’s not always the case. There are good cards that offer no foreign transaction fees, like the following:

• VentureOne Rewards from Capital One
• Discover it® Cash Back Credit Card
• The Bilt Mastercard
• Bank of America® Travel Rewards Credit Card

There are others, but finding a card that has both no foreign transaction fees and no annual fee is hard to come by.

Debit cards

There are options available for debit cards that charge no foreign transaction fees (and out-of-network ATM fees). We’ve talked about this option separately, but it’s worth repeating here. Using a foreign currency could be done with no additional fees to you.

While it’s convenient to use credit cards for as many transactions as possible, some locations are more accepting of cash than cards. So having some local currency might be necessary. Some options of fee-free debit cards include:

• Schwab Bank Visa® Platinum Debit Card
• Fidelity^® Debit Card
• Capital One 360 Checking Debit Card (ATM operator fees apply)
• Discover Cashback Debit (ATM operator fees apply)
• SoFi Checking Debit Card (however a 0.2% fee and ATM operator fees apply)
• Revolut Pre-Paid Debit Card (limits apply)

And if you have too much currency leftover after your trip? Just pay down your hotel bill with it or buy something at the airport. Or, if you’re already home, if you have any desire to return to the destination, we would just hold onto it until the next trip. Why bother continually changing the currency (and getting eaten up by exchange fees)?

Other nuances to know

Peer-to-peer (P2P) foreign currency exchanges

One other option available to you that might help you avoid fees is to exchange currency with someone else. While foreign transaction fees range between 1% and 3%, P2P networks tend to charge half that amount.

The premise is simple: if you have cash in one currency but a friend, family member, or stranger has the currency you need, you can trade wallets in a way that makes each whole. Finding the friend or family member with whom to trade is not too difficult. But the stranger? That’s where P2P networks come into play.

However, if you do go down this approach, do note that there is less regulation with this approach and thus fewer protections if something goes wrong. Trade currency and the wrong amount was given back to you? It might be tough to get it back. On top of that, if no one has the currency you want–and you don’t have what they’re looking for–it might be a challenge.

Personally, I’d only consider this approach if withdrawing cash from a foreign ATM wasn’t an option for us.

Each payment network will exchange currency at a different rate

Each bank is part of a larger payment network (think Visa, Mastercard, and American Express). In reality, it’s the payment networks that set the exchange rate for individual banks underneath. Banks could use those rates, but also potentially pad the exchange rate on top of that.

Let’s look at a few examples:

• American Express will base the exchange rate on the rates from the prior business date. On top of that, the currency might be converted multiple times in the process. It’s silent on whether any pad is added into the rate.
• Mastercard bases the exchange rate based on the time and date the charge is processed. It also confirms that individual banks may or may not use this exchange rate at their discretion.
• Visa charges an exchange rate based on the date and time the charge is authorized. It also confirms banks may add in a load to these rates at their discretion.

In other words, three payment networks and three methodologies. Since American Express is both a payment network and a bank, some believe the exchange rate is absent of extra pad. However, it’s important to remember that currency fluctuations happen by the minute. It’s certainly possible to end up benefiting from any of these networks based strictly on the movement of the foreign currency exchange rate.

Suggested reading:

• The Best Credit Cards To Use At Costco
• Keep or Cancel: How to Handle Too Many Credit Cards
• Pro Tip: Keeping Your Credit Cards Open With Five Simple Tasks