Credit card purchases in foreign countries. Card issuers hide their dirty billing secret: GREED.
Apr 24, 2001 (Updated Jan 7, 2005)
The Bottom Line Many credit cards add a 1% to 3% fee whenever you use them in a foreign country. They don't do anything to earn it; then they hide it from you.
Here's another way your credit card can hurt you if you're not careful.
How would you feel if you charged $100 on your credit card, but the transaction showed up as $102 or $103 on your monthly bill? What if your credit card issuer simply added 2 or 3 percent to all of your charges? Well, that's exactly what the majority of US credit card issuers do whenever you use your card in a foreign country. The practice is pure greed, and you're not getting anything for your money.
The Mechanics of Foreign Credit Card Transactions
When you use your credit card to pay your hotel bill in Paris, you're really paying in euros, but the charge appears on your bill in dollars. If you look carefully, you'll find that you've been charged from 1% to 3% more than the competitive exchange rate for this "service."
In reality, your credit card issuer isn't providing any service for this fee because it's the international Visa and MasterCard associations that actually make the currency exchange. They pay out euros, for example, to the merchant who submitted the charge and get back dollars from credit card issuing banks in the USA. American travelers already pay for this exchange service because the Visa and MasterCard associations levy a 1 percent currency exchange fee on transactions made abroad before submitting them to your credit card issuer who in turn submits the charge to you. Nevertheless, the majority of credit card issuers tack on an additional 1 to 3 percent of the charge amounts submitted to them by the clearing associations.
So What's in It for Me?
So what are you getting for that charge? Amazingly, you get absolutely nothing. The charge represents pure greed, and the issuing banks know they can get away with it because it's buried in the foreign exchange transaction. There's no line item on your bill for the charge. You would have to do some research to realize that you've been charged roughly 3% more than a competitive exchange rate would suggest.
I know some of you are saying, "the clearing associations are charging 1%, so I see where they get their profit, but I don't see how the card issuing bank can make a profit unless it collects a fee for the transaction, too." Well, they profit in the usual way. When that French hotelier submits his 100 euro Visa charge, Visa actually pays him only about 97.50 euro (roughly a 2.5 % "discount"). That's how credit card issuers make their profit besides collecting interest on unpaid balances. In an international transaction, the "discount" will be split between the clearing association and the credit card issuer, so between it and the 1 percent currency exchange fee, they already have 3 percent to play around with.
How Do I Know What My Card Issuer Is Charging
Get out your card issuer agreement and look at the fine print under "currency exchange," "foreign currency transactions," or a similar heading. Both the 1% association charge and any charge by your issuing bank should be spelled out there, although the wording may not be crystal clear. For example, in the section titled Foreign Currency Transactions of the disclosure statement for my US Bank REI Visa Card, it says:
"If you make a transaction in currency other than U.S. dollars, Visa... will convert the charge or credit into a U.S. dollar amount. Currently, Visa... use[s] a currency conversion rate of either (1) a wholesale market rate or (2) a government mandated rate, increased by an adjustment factor determined by us [US Bank] and Visa.... The adjustment factor, which is subject to change without notice is currently 3% of the U.S. dollar amount, of which we [US Bank] receive 2% and Visa... the remainder." [italics mine]
So, Visa gets 1% and my card issuer, US Bank, gets 2%. Visa actually did something to earn its 1 percent, but my issuing bank didn't do a thing except add on the charge!
How Do I Find Out the Charge for a Card I'm Thinking of Getting?
There are two ways to go about this:
First, call the toll free number on the solicitation and tell them you want to discuss the terms of the offer. Specifically, ask about how much is charged on foreign currency transactions, and of that amount, how much is charged by the card association and how much is charged by the card issuer. Unfortunately, you may have a hard time getting a reliable answer to these questions. Representatives aren't often well trained on this subject.
Second, check bankrate.com, which may have this information for the card your thinking about--or not.
Who's Charging How Much Now?
Before you delve into this section, remember two things: 1) A specific card issuer like Bank One issues many different cards, each of which may have different policies, and 2) any card issuer can change its policies on any card at any time with appropriate notice. So read your cardholder agreement carefully, and read any change notices you receive. The following facts were taken from an article on bankrate.com (April 2001).
Bank of America charges a 2 percent fee on all ATM, debit, and credit card transactions abroad (in addition to the 1 percent association fee). It also charges $1.50 to $2.50 every time you use an ATM abroad.
Other big issuers that charge 2 percent in addition to the 1 percent association fee are Citibank, Bank One/First USA, Chase Manhattan, Providian, and Wells Fargo.
Capital One, MBNA America, FleetBoston, and Wachovia Bank are not charging extra fees on foreign transactions at this time. Furthermore, most credit unions and community banks don't charge these extra fees either.
American Express customers pay a 2 percent fee on all foreign currency transactions.
Issuers can change their policies any time, so check with yours shortly before your trip if you want to try to avoid this fee. Unfortunately, I've found it very difficult to talk to agents who knew enough to give a definitive answer. Now, I just ask for a supervisor at the beginning of my call.
The Good News
Even with these fees, using credit and debit cards is less costly than exchanging US cash or traveler's cheques. That's because the credit card associations aggregate all their foreign exchange transactions to get highly competitive exchange rates available only to the big boys and girls. As a small currency trader dealing directly with an exchange or bank, you are likely to lose 5 to 7 percent compared to the commercial exchange rate on every foreign currency transaction. So even with the extra charges, using a credit card gives you a 1 to 6 percent advantage over local currency exchanges. Maybe that's what keeps more people from complaining.
For my review of a no-fee card that doesn't charge extra, see no foreign use fee on this Visa card .
For my review of a no-fee card that gives 1% cash back on all domestic transactions, see a great cash-back Visa card .
Technical Appendix: Real World Examples
Example 1: A Poor Visa Card for Foreign Travel
On 9/9/2000, I used my REI Visa Card to pay for a hotel in Amsterdam. On the subsequent Visa bill, the line item for this transaction had the following information:
Posting date: 9/12
Foreign currency amount: 927.99 NLG (Netherlands Guilder)
Charge in US$: $366.58
By consulting the foreign exchange table in a back issue of The Wall Street Journal, I found that the competitive exchange rate between dollars and guilders on 9/12/2000 was about 2.61. Dividing 927.99 guilders by 2.61 gives $355.55. Dividing the actual dollar charge of $366.58 by $355.55 shows that Visa and my card issuer tacked on a total of 3 percent above the "competitive" exchange rate.
Note that use of the word "rate" in the Visa bill is misleading in that it implies that 2.53148 is the currency exchange rate when it is actually a combination of the exchange rate, the 1% Visa charge, and the 2% Bank of America charge. The bill never breaks out these individual "fees," which amount to $11.03.
Example 2: A Good Visa Card for Foreign Travel
On 7/5/2004, I used my MBNA Platinum Visa Card to pay a hotel bill in Monterosso, Italy. The subsequent billing statement looked like this:
Posting date: 7/6
Foreign currency amount: 265.00 EUR
US dollar charge: $329.60
By consulting www.x-rates.com, I found that the competitive euro-to-dollar exchange rate on 7/6/04 was 1.229. Multiplying the euro amount by this factor and tacking on another 1% Visa association charge gives $328.94, a bit less than the $329.60 they actually charged me. Since this extra amount was only about one-fifth of one per cent, I attribute it to currency trading fluctuations during the day. In particular, it's clear that MBNA did not add on the kind of extra charge I'm talking about.
As a side note, there is no mention of a "conversion rate" in the MBNA bill. They just give the foreign currency amount and the dollar amount.
For my review of this card, click MBNA Visa .