It’s usually best to use credit cards when you travel.
For one, credit cards are safe because they come with fraud prevention features. There’s no danger of someone draining your bank account.
Also, credit cards offer great exchange rates. They convert currencies at the market rate, which is usually better than the rates you get from ATMs and money changers. (Check out this post: which payment methods to use in various situations abroad.)
But if you think there’s a catch, you’d be right. There are two catches, actually: foreign transaction fees and dynamic currency conversion fees. But you can avoid paying these fees.
#1. Foreign Transaction Fees
For a regular transaction abroad, most credit cards charge a foreign transaction fee of 3% — 1% goes to the transaction network (MasterCard, Visa, etc.) and 2% to your bank.
It doesn’t seem like much, but 3% of every transaction adds up. You could be hemorrhaging money! If you spend just $1,000, you’d be paying $30 in foreign transaction fee. That’s one night in a hostel or a nice dinner out.
And if you’re on an extended round-the-world trip or traveling indefinitely, you could easily pay hundreds of dollars in foreign transaction fees per year. On a conventional budget of $20,000 a year, you’d pay $600 to your bank. That money could cover a few nights of pampering yourself at a nice hotel or even a whole month of expenses in some places!
Why would you want to give your bank all that money when you don’t have to?
How to Avoid Foreign Transaction Fees
Some credit cards don’t ever charge you foreign transaction fees. It may take some time for you to find and get the best credit cards for travel abroad. But once you get one of these cards, you’d be on your way to great savings.
- Americans are spoilt for choice, but many travelers prefer Capital One — it doesn’t charge foreign transaction fees.
- Brits also have many choices, but I’ve heard especially good things about the Halifax Clarity MasterCard — it doesn’t charge foreign transaction fees or cash advance fees.
- Canadians don’t have as many options, but at least there are some Chase credit cards that waive the foreign transaction fee. Check out the Chase Marriott Rewards Premier Visa card and the Chase Amazon.ca Rewards Visa card.
- For Australians, the 28 Degrees MasterCard charges no foreign transaction fees, annual fees
or cash advance fees. (As Sharon mentions in the Comments, they now charge you fees for cash withdrawals.)
- New Zealanders, sadly, don’t have any credit card without foreign transaction fees. Your best bet is a prepaid card, the Air New Zealand OneSmart MasterCard. You can read more about it on this blog post by a savvy Kiwi.
#2. Dynamic Currency Conversion Fees
When you pay for a transaction abroad, the default is to pay in the local currency of the country where you are. For example, if you pay for dinner in Thailand with your American credit card, you would pay the merchant in Thai bahts. Your bank would then convert the currency for you in the credit card statement.
Sometimes, the merchant offers you the option of making the payment in your home currency — a service known as dynamic currency conversion (DCC). Using the same Thai dinner example as above, you would pay the merchant in U.S. dollars. Now, the merchant is the one who converts the currency for you, usually at a worse exchange rate. Additionally, you’d end up with a DCC fee of between 3% and 7% for the “convenience” of paying in your home currency.
Yes, it’s pretty evil.
How to Avoid Dynamic Currency Conversion Fees
- Always pay in the local currency of the country where you are.
This could be easier said than done because some merchants would go to great lengths to make you pay in your home currency. After all, this is quite a profitable scheme for them.
- Use an American Express credit card.
AmEx forbids their merchants from charging currency conversion fees on their cards.
(To learn more, read this post, which goes into more detail about DCC.)