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What Is a Foreign Transaction Fee?

You may use your credit card to make payments everywhere, including when you travel the world. But be careful: Paying with a credit card in a foreign country can come with foreign transaction fees.

Your credit card may charge a foreign transaction fee whenever you buy something outside of the U.S. This fee can apply when you're physically in another country or when just your transaction takes place abroad.

"One thing to keep in mind is that you can get charged this fee if you buy something online from a company that is based outside of the U.S. or if you make a purchase in which the transaction is routed through a non-U.S. bank," says Mike Kinane, head of U.S. bank cards at TD Bank.

Foreign transaction fees can add up, but you won't be charged fees if you use the right card.

[Read: Best Rewards Credit Cards.]

How Much Are Foreign Transaction Fees?

Foreign transaction fees vary from card to card. Some credit cards don't charge any, while others typically charge around 3%. Either way, your credit card should clearly explain whether foreign transaction fees apply and how much they are.

"If your bank does charge a foreign transaction fee, then you can find that on your terms and conditions, sometimes called 'pricing and information.' The foreign transaction fee will be listed under the fees section," says Kinane.

A foreign transaction fee is typically easy to identify after you buy something. "These fees are charged at the time of the purchase and typically appear as a separate charge on your statement," says Kinane.

Not all cards have just one foreign transaction fee rate. The rate may be different depending on how you make the transaction. For instance, a card may charge a 2% foreign transaction fee for each foreign purchase or ATM advance made in U.S. dollars, but a 3% fee for purchases or ATM advances in a foreign currency.

It may look smart to make purchases in U.S. dollars and save on the card's additional 1% fee, but looks can be deceiving. Overseas merchants that offer prices in both U.S. dollars and their local currency may not offer the most favorable or up-to-date currency conversion rates. You're usually better off paying in the local currency and letting your credit card's conversion rates determine the price.

Consider a No Foreign Transaction Fee Credit Card

The easiest way to avoid paying foreign transaction fees on credit card purchases is by using a credit card that waives them. It's a benefit offered by some, but not all, credit cards.

"Planning on how to pay for trip expenses should be no different than planning your daily itinerary. Prior to traveling abroad, consult with your credit card companies to find out the best credit card to use to avoid or reduce transaction fees," says Bob Castaneda, director of Walden University's accounting and finance programs. If you can't find the terms and conditions paperwork you received with your credit card, you can call the phone number on the back of your card and ask a customer service representative.

[Read: Best No Foreign Transaction Fee Credit Cards.]

Typically, travel-focused credit cards are most likely to waive foreign transaction fees. These cards may also offer travel rewards and cardholder perks, such as travel insurance.

If you plan to make foreign transactions, whether during a trip or online, consider getting a card that waives foreign transaction fees. It can add up to serious savings. For instance, spending $6,000 while traveling through Europe will cost you an extra $180 if you're charged a 3% foreign transaction fee.

However, adding a credit card to your wallet may not be worth the effort if you don't have a foreign trip planned or don't travel abroad often. If you only plan to make occasional purchases that are subject to foreign transaction fees, paying the fee may be worth it to avoid opening a new card.

Pros and Cons of Using Foreign Cash

Credit cards aren't your only choice abroad. Debit cards are an option, but foreign transaction fees are common on those, too. You can also use cash in the foreign currency, but it's not a perfect solution.

While it's a good idea to carry at least some foreign currency so you're prepared for vendors that don't accept other payment methods, you don't necessarily want to make all of your purchases that way. And, obtaining foreign cash comes with its own fees.

[Read: Best Travel Rewards Credit Cards.]

"You should ask yourself how comfortable are you traveling with the local currency and does it outweigh the fees that you will be charged," says Kinane.

Find out how much it will cost to convert currency. Even if your debit card charges foreign transaction and ATM fees, withdrawing money in local currency from an ATM may be cheaper than converting cash at an exchange. You should compare the costs of obtaining cash with the cost of any applicable credit card foreign transaction fee.

And keep in mind that you're out of luck if your cash is stolen, but credit cards come with protections against fraud. While there may be hassles with getting a credit card replaced quickly while abroad, at least you won't lose money if you get pickpocketed.

Foreign transaction fees may seem like a way for credit card companies to nickel and dime you. But they are avoidable with the right cards and can be worth paying, under some circumstances. And even if you're paying a foreign transaction fee, the safety value of using a credit card abroad could outweigh the cost.

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