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Understanding Foreign Transaction Fees

April 12, 2024
min read

The first time your teen travels abroad, particularly on their own, they’ll likely encounter spending nuances that are different from what we’re used to in the U.S.

Things like differences in tipping from one culture to the next, currency conversions, and added fees are all helpful to discuss before departing on an international adventure.

Today, we’ll be discussing foreign transaction fees - what they are, how much banks typically charge, and most importantly, ways to avoid them.

What is a foreign transaction fee?

A foreign transaction fee is a fee imposed by banks and payment card issuers for transactions made overseas or with a foreign merchant. Foreign transaction fees are most often charged when you use a payment card abroad, but they can also be applied to online purchases you make at home from a foreign vendor that processes the transaction in its local currency.

You might also see foreign transaction fees referred to as “foreign purchase transaction fees” or “foreign currency transaction fees.”

Now that we’ve covered the definition of foreign transaction fees, time to dive deeper.

Let’s start with an example to bring this concept to life a little better. Say you’re from the U.S. and you’re going on a trip to London. We know the U.S. and the U.K. use different currencies: dollars in the U.S. ($) and pounds (£) in the U.K.

You might be wondering if you can still use your usual credit or debit card.

With different currencies, you might be wondering if you can still use your usual credit or debit card. In most cases, the answer is yes. Visa and Mastercard are widely accepted globally, so if your cards are issued by one of those networks chances are you can use it in other countries. On the other hand, American Express and Discover are accepted less frequently outside the U.S.

Just because your card is an acceptable payment method in other countries doesn’t mean you should use it in those countries. At the end of the day, you also want to know what fees are associated with international purchases, and exactly how much those fees will cost you.

How much are foreign transaction fees?

Foreign transaction fees tend to be 1-3% of your purchase total. As an example, let’s say your card does charge a foreign transaction fee and you make a purchase while in London for a football jersey that costs £115.

If your card charges a foreign transaction fee, you could end up paying an extra £1.15-£3.45. While that might not hurt your wallet too badly on a single transaction, the fees can add up quickly and you might be in for a not-so-pleasant surprise when you check your balance at the end of your trip.

The exact amount of foreign transaction fees depends on the card you have, and is outlined in the agreement when you sign up.

How to avoid foreign transaction fees

While you might think the easiest way to avoid foreign transaction fees is to only use cash while traveling abroad, there’s actually a much easier solution (and keep in mind there are fees associated with converting cash to different currencies, so cash-only isn’t free either).

The easiest way to avoid foreign transaction fees is to opt for a card that doesn’t charge a foreign transaction fee. That’s right - not all credit and debit cards impose foreign transaction fees, even if you make a purchase in another country or with a foreign merchant.

Pay special attention to what fees you may be charged.

While many of the credit cards currently on the market charge a foreign transaction fee, the number of credit cards with no foreign transaction fees is growing.

That said, credit cards with no foreign transaction fees also tend to have higher credit score requirements, so you’ll have to keep that in mind.

Debit cards could also charge you foreign transaction fees, so make sure you read the fine print every time you get a new card, and pay special attention to what fees you might be charged.

Final note on foreign transaction fees

When it comes to traveling (and spending) abroad, we know we’re in for some new experiences. Some of those new experiences, like eating fresh homemade pasta in Italy or visiting the Louvre in France, are amazing and exactly what we’re after! And some of those new experiences, like calculating the difference in spending abroad versus at home, are less amazing and something we want to be prepared for.

Your kid’s first time traveling abroad, especially one where they’re spending on their own, is an incredible experience. To ensure it’s as impactful as you hope, help them prepare for things like spending, including how to budget for fees and tipping in other countries.

Safe travels!