Credit cards are designed for convenience, but they don’t cross boarders seamlessly. In addition to EMV compatibility issues and false fraud alerts, there may be some extra costs to use the card. To prevent your trip from being more expensive than it already is, be mindful of these two costs you might encounter. Caution: the second one is often disguised as a convenience.
1. Foreign transaction fees
If your transaction is processed by a foreign bank, your bank may charge you a foreign transaction fee, although an increasing number of cards these days are waiving the fee entirely. If your card does charge a fee, it will range from 1 to 3 percent, depending on the issuer.
Whether a card charges a foreign transaction fee and how much it charges are easy to find out – the information will be disclosed on the card’s application page and in your terms, and if you use your card abroad, those fees will be itemized on your statement. It wasn’t always so straightforward, though, says Eric Grover, payments industry expert and principal at consulting company Intrepid Ventures. Until a class action lawsuit and resulting $336 settlement in 2006 prompted transparency, the fees (then commonly called “currency conversion” fees) charged on foreign transactions were poorly disclosed.
“They simply buried it in the charges on your statements,” Grover says.
Now that issuers are more up front with foreign transaction fees, informed consumers have driven competition — and most major issuers are waiving foreign transaction fees on at least some of their cards to appeal to globetrotters.
“Disclosure has introduced some element of competition for consumers for whom it’s relevant,” Grover says.
2. Dynamic currency conversion
If a merchant or hotel clerk overseas asked you if you’d like to pay for a transaction in dollars instead of the local currency, would you say “Yes”? That answer will cost you money.
This seemingly helpful offer is actually a service called dynamic currency conversion (DCC), which is extended to merchants through their acquirers (the banks they use to process transactions). While having the transaction processed in your familiar home currency may seem like a convenience, the merchant is actually marking up the cost by using an exchange rate that is far less favorable to you than the close-to-wholesale exchange rate your issuer would use.
According to Grover, that markup may be up to 5 percent of the transaction. And here’s the kicker – because the payment was processed by a foreign bank, your issuer will levy its foreign transaction fee as well. If your card’s foreign transaction fee is 3 percent, that could mean a grand total of 8 percent over the original cost.
“There is no one in the payments industry who would recommend his mother use DCC,” Grover says. “I think it’s unconscionable.”
Merchants are supposed to follow some rules set by card networks (Visa, MasterCard, etc.) when offering DCC. According to a Visa spokeswoman, the merchant must explain DCC, and the cardholder must consent to it before the payment is processed.
“But it’s not a meaningful disclosure,” Grover says. It’s not as if consumers are being presented with a clear comparison of the costs of running the transaction in their home currency vs. the local currency, he says. Instead, they’re being offered the ability to see their total in dollars, which might be a comfort in an unfamiliar place – or something they might automatically agree to when a line is forming behind them.
“The consumer has no basis of making an informed decision,” Grover says. “There’s almost nobody on the planet who would knowingly pay 4 or 5 percent extra for the comfort of seeing their home currency.”
Plus, a merchant (or perhaps just untrained cashier) may process the transaction in the cardholder’s home currency without asking – or insist DCC is required for foreign cards. It’s happened to Grover in Warsaw, London, Hong Kong and Paris.
“I insisted I wanted the transaction done in the domestic currency, and the clerk either made a mistake or in some cases said they had no choice because it’s a U.S.-issued card,” he says.
Here’s how travelers can avoid the inflated costs of DCC:
- Just say no. If the clerk asks if you want the payment processed in dollars, say, “No, thank you” and ask the that charge be processed in the local currency.
- Look at the receipt. If the cashier used DCC anyway, this is where you’ll notice it – the total will be in dollars.
At that point, politely tell the cashier there’s been a mistake and ask that the transaction be reversed. However, the cashier may not know how to reverse the transaction or say it can’t be done. You may also be contending with a language barrier.
“At that point, your recourse is to complain to the issuer,” Grover says.
- Dispute the transaction with your issuer. If the merchant won’t reverse the transaction, go through your issuer’s charge-back process. Explain that you didn’t choose DCC and are therefore disputing the transaction. Grover has done this successfully.
“Very often, they’ll credit you for the whole transaction,” he says.