How foreign transaction fees work (and how to avoid them)

The Extra Charge on Your Vacation Dinner

Imagine you are in Lisbon and have a wonderful dinner that costs €100. The exchange rate is about 1.08 dollars to the euro, so you expect the charge on your credit card statement to be $108. A few days later, you check your account and see a charge for $111.24. The extra $3.24 is not a tax from Portugal. It is not a tip you forgot about. It is a foreign transaction fee, charged by your bank in the United States for the privilege of using your card somewhere else.

This fee is a direct cost to you. It makes everything you buy on a trip more expensive. Understanding how it works is the first step to avoiding it completely.

The Path of Your Purchase

When you swipe your card for that €100 dinner, a multi-step process begins. That $3.24 fee is added near the end of the line.

1. The restaurant in Lisbon sends the €100 charge to its bank.
2. The restaurant’s bank sends the transaction to the payment network, which is almost always Visa or Mastercard.
3. The payment network converts the currency. It takes the €100 and changes it to U.S. dollars using a wholesale exchange rate. This rate is very close to the official rates you see in the news. For this currency conversion service, the network charges its own fee, typically 1% of the transaction amount. The Federal Reserve has noted that these network-level fees are a standard part of international card processing.
4. The network then passes the U.S. dollar amount, including its 1% fee, to your bank. So, your bank receives a bill for roughly $109.08 ($108 for the dinner plus $1.08 for the network’s fee).
5. Your bank now makes a decision. If your credit card has a foreign transaction fee, the bank adds its own fee on top of the network’s charge. Banks typically aim for a total fee of 3%. Since the network already charged 1%, your bank adds another 2% ($2.16 in this case), bringing your final cost to $111.24.

This is the mechanism. The fee is a combination of the payment network’s wholesale currency exchange fee and your own bank’s additional charge. When a card advertises “no foreign transaction fees,” it means the issuing bank has decided to absorb the 1% network fee itself rather than passing it, and more, on to you. The bank pays the cost as a way to win your business.

Why Do Some Banks Still Charge This Fee?

Banks that charge the fee state that it covers the costs and potential risks of processing transactions from other countries. But competition tells a different story. The practice of waiving foreign transaction fees became common in the late 2000s as card issuers fought to attract frequent travelers and high-spending customers. So many cards now offer this benefit, including many with no annual fee, that the 3% charge has become more of a profit-booster than a necessary cost. Banks are betting that many customers will not notice the charge or will not bother to get a different card for travel.

These fees are not small change when added up. The Consumer Financial Protection Bureau’s 2023 report on the credit card market noted that issuers collected over $25 billion in what the agency calls “other” fees during 2022. This broad category includes foreign transaction fees.

The Currency Choice You Must Always Refuse

While traveling, you will encounter credit card machines that offer you a seemingly helpful choice. The screen will ask if you want to pay in the local currency (euros, for example) or in your home currency (U.S. dollars). This is called Dynamic Currency Conversion (DCC).

You should always choose to pay in the local currency. Always.

When you choose to pay in U.S. dollars, you give the merchant’s bank, not Visa or Mastercard, the power to decide the exchange rate. They have a strong incentive to give you a poor one. The rates used in DCC can be 7% or even higher than the market rate. The Consumer Financial Protection Bureau has issued warnings about this practice for years, noting in a 2017 post that the convenience comes at a high price.

Even if your card charges a 3% foreign transaction fee, using it is still cheaper than accepting a terrible 7% exchange rate through DCC. Decline the “offer” and let your card’s network handle the conversion. It saves you money every time.

How to Know for Sure if Your Card Is Fee-Free

Do not trust the marketing name on the front of the card. The only reliable place to find out if your card charges a foreign transaction fee is in its official pricing and terms document. This information is presented in a standardized table that federal law requires. It’s called the Schumer Box, named after then-Congressman Charles Schumer, who sponsored the 1988 legislation that created it.

In this table, you will find a line item labeled “Foreign Transaction.” The entry next to it will give you the answer. It will either state a percentage, like “3% of each transaction in U.S. dollars,” or it will say “None.” You want a card that says “None.”

What About Debit Cards and Cash?

Your debit card is not a free pass. Most debit cards issued by U.S. banks also charge foreign transaction fees on purchases, working in much the same way as their credit card counterparts. Check the fee schedule for your checking account to be sure.

Worse, using your debit card at an international ATM often triggers two separate fees. First, you will pay a foreign ATM fee to your own bank (often a flat $5). Second, you will likely pay the 1% to 3% foreign transaction fee on the withdrawal amount. Taking out $100 in cash could cost you $8 in fees right away. Withdrawing larger amounts less frequently is the only way to minimize the damage from flat fees.

The best strategy for most travelers is to use a credit card with no foreign transaction fee for all purchases, from hotel rooms to train tickets to meals. For cash, seek out a debit card specifically designed for travel, often from a brokerage or online-only bank, that reimburses all ATM fees. This combination ensures you are not paying extra just for being in another country.