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Many credit card companies carefully spell out foreign transaction fees in their monthly billing statements, but for the inexperienced foreign traveler, it can be difficult to sort out how much extra you pay the credit card company in foreign transaction fees versus overseas taxes such as VAT or other expenses.
It's important for first time travelers to understand three important expenses related to buying from a foreign company. It's also worth mentioning that you don't have to travel to incur these expenses; people who order from online businesses such as Amazon.co.uk are also subject to these fees. But what are they?
The first is the foreign transaction fee charged by your credit card company. This may be as low as 1%, but higher rates (4% or more) are more common. These fees are usually calculated based on the purchase price after it is converted to dollars. Call the customer service number on your credit card to get the exact rate, they are subject to change. If you know the exact amount of the going rate, you can plan your travel budget accordingly. Some people compare credit cards to find the lowest rate, a strategy that works well as long as you stay current on the latest rates.
When checking your transaction fees or comparing credit card offers, be sure to ask the customer service representative if there are additional fees per each individual transaction or a single percentage fee charged for the total balance on your card for purchases in another country. You should also ask if a separate fee for cash advances applies. Some credit cards charge an additional fee for such advances from overseas ATMs. Are you able to do a cash advance in the local currency? Or are you limited to an advance in U.S. dollars? Either way, knowing your ATM fees can help you plan your budget accordingly. You can avoid additional expenses by withdrawing more money once, rather than paying multiple fees.
The second type of expense comes with the local exchange rate. Many travelers check the exchange rate before the trip but forget to check again before they make purchases. Your card will be charged the exchange rate available at the exact time of sale. If the rates have increased since you last checked your credit card statement will reflect the higher rate and the corresponding fee your credit card company charges based on the price in dollars.
Some travelers wind up paying higher exchange rates when a vendor offers to charge the credit card in U.S. dollars rather than the local currency. Doing so allows the seller to set their own exchange rate, which may not be to your advantage. It's best to make your purchases in the local currency.
The third expense connected with foreign purchases on your credit card is taxes. In the United Kingdom for example, the Value Added Tax or VAT may be charged at the full rate of 17.5%, a reduced rate of 5% or no VAT at all depending on the nature of the purchases. Since VAT contributes to the final cost of your transaction, it is a factor when counting the final cost in both the exchange rate and your credit card company's transaction fee. Some countries allow visitors to recover the VAT for purchases before departing the country, so it is possible for travelers to save a bit of money on these transactions if you take the time to provide the receipts and fill out the forms.
There is no standard foreign transaction fee — credit card companies offer a wide range of terms. Some companies don't charge any fees, but it's important to know whether a particular card is accepted at your destination. Some cards with attractive terms may have limited use outside the United States, which is one reason frequent travelers compare credit cards and carry more than one. By doing plenty of homework on your credit cards and your options, you can avoid paying more for your transactions than is absolutely necessary.
See also: Credit Cards: About International Transaction Fees
