Foreign transaction fees vs. currency conversion fees

9 min read

Are you counting down to your upcoming foreign holiday? Or perhaps you’re paying the bills for your property abroad, or running a business that makes international payments? Whatever your reason for making purchases overseas, you’re likely to encounter foreign transaction fees and currency conversion fees. In this piece, we’ll take you through the key differences between the two, the costs involved and how you can avoid fees on your foreign purchases or withdrawals.

Man at airport

What is a foreign exchange transfer fee?

A foreign exchange transfer fee is a fee that can be imposed by your credit card issuer (which is usually a bank) any time you make a purchase or withdrawal overseas or online through a foreign merchant. You’ll encounter this fee from most issuers of both credit and debit cards and it’s paid in the local currency of the country you’re purchasing from. In addition to the potential fees charged for using an ATM network in another country, withdrawals from foreign ATMs can also incur a foreign transaction fee.

How much you can expect to pay

Your credit card issuer can either charge a foreign exchange transfer fee as:

  • A flat fee to receive money from abroad, as well as send funds – there may be a higher fee depending on the currency in which your payment is sent.
  • A percentage of the purchase price or withdrawal – you’ll find this fee stated on your credit card’s terms and conditions – it can be anything from 0-3%.

A fee of up to 3% may not sound like a lot for one or two payments. However, you’ll find it quickly adds up if making frequent daily payments on holiday, or paying your overseas property bills, such as foreign mortgage payments, services and utility bills.

As an example, you could be in the USA and make four international transactions at $30 each. With a foreign exchange transfer fee rate of 3%, you would pay $26.40 in foreign transaction fees.

What is a currency conversion fee?

A foreign currency conversion fee is an additional charge for converting a transaction from your home currency to a foreign currency. It can be charged by your credit card payment processors, such as American Express, Visa or MasterCard, or by the individual merchant.

Your bank currency conversion fee will be charged at the same time as your foreign exchange transfer fee. They can either be rolled together into one foreign transfer fee, or included in the purchase price of the item. Cards with no foreign transaction fees tend to have currency conversion fees that are likely absorbed by the credit card issuer.

We’ve broken down the key differences between the two main types of currency conversion fees:

Currency conversion fee – via your credit card issuer

A currency conversion fee will be charged by your credit card issuer and calculated using the daily exchange rates from their payment processor. Large credit networks like Visa and MasterCard negotiate competitive exchange rates, with currency conversion fees typically being 1% of the purchase price. This fee is applied to all transactions, regardless of the type of credit card.

Dynamic currency conversion – via the merchant

Have you ever made a purchase internationally and been asked whether you’d like to convert your purchase to your own currency? This is dynamic currency conversion (DCC).

With DCC, you’re able to instantly find out the cost of your purchase in pounds sterling. However, you’ll experience a higher currency conversion rate, as it’s up to the merchant at the point of sale to set the currency exchange rate.

If you choose to pay in your home currency, you’ll be charged an additional fee of up to 12% of the purchase price. The reason merchants pick an unfavourable exchange rate is because it boosts not only their profits, but the profits of the third-party DCC service provider too.

How much you can expect to pay

To put this into perspective, let's go back to the earlier example.

You've made four transactions at $30 each with a foreign exchange transfer fee rate of 3%. So you've paid $120 plus $26.40 in foreign transaction fees, a total of $146.40.

Let’s say your credit card issuer’s currency conversion rate is at 1%. In this case you’d calculate 0.3 * 4 = $1.20. Added onto the figure above, your total would now be $147.60, which isn’t that much higher.

However, if you choose DDC at the point of purchase and the merchant sets their rate at 12%, you’d calculate 3.6 * 4 = $14.40. Your total purchase price would now leap to $160.80.

Tips for avoiding fees

Here are a few of our top tips to consider when the time comes to making international payments.

1. Apply for a ‘no fee’ credit card before you travel

You can use a Discover card overseas without incurring foreign transaction fees (which are typically 1-3%). Just check before you travel that the country you’re visiting accepts Discover cards, since they’re less well-known outside the USA.

2. Spot foreign transaction fees in your credit card’s terms and conditions

Check the terms and conditions (also called "Pricing and Terms" or "Rates and Fees") of your particular card and look under the "Fees" section. You’ll find your foreign transaction fees alongside the card’s annual fee and other fees, such as cash advance and penalty fees.

3. Always pay in local currency and decline DCC when offered

Purchasing in the local currency allows your card issuer to control when they process the conversion, which ensures you get a well-negotiated exchange rate. As tempting as DCC may be, you’re almost always guaranteed to pay more, and you can’t be certain which rates are associated with which merchant’s DCC option.

4. Use a trusted payment provider like Clear Currency

Clear Currency allows you to make your payments quickly, securely and, crucially, with complete transparency on the rates you’re getting and any fees you may incur. When you set up an account, you’ll be assigned a dedicated foreign exchange specialist who can discuss how best to meet your needs and get the best rates for the currency you’re buying.

Foreign transaction fees vs. currency conversion fees: key takeaways

  • Foreign exchange transfer fees are levied by your credit card issuer every time you make a purchase abroad or with a foreign merchant. Expect to pay 0-3% of your purchase price.
  • Currency conversion fees are additional charges imposed by your credit card's payment processor for converting money from your home currency into a foreign currency.
  • Sometimes, your foreign exchange transfer fee and currency conversion fee can be combined into one foreign transfer fee.
  • There are two types of currency conversion fees, those imposed by your credit card issuer which sit at around 1%, and dynamic currency conversion (DCC) by the merchant at the point of sale, which can be anything up to 12%.
  • Save on your currency conversion fees by making international payments in the local currency, rather than your home currency.
  • Get the right help by speaking to Clear Currency, who will advise you on when to make your transfer to take advantage of a constantly fluctuating currency market.

Save on your foreign currency transfer fees with Clear Currency

Whatever your reason for making a currency transfer, sending directly via your bank will incur serious fees and almost always mean you'll be getting an unfavourable exchange rate. Instead, Clear Currency can help you secure market-leading rates and guide you on the right time to exchange based on current and predicted future rates.

Using Clear Currency for your currency transfer offers a wealth of benefits:

  • Expertise to help you pick the best time to move your money
  • Best exchange rates based on the mid-market rate
  • Secure and reliable – we’re FCA regulated
  • Protection from fluctuating rates with locked in forward contracts
  • Huge savings in hidden fees, charges and inflated exchange rates from the banks

Get started by signing up for a no-obligation account today. It's free, takes only a couple of minutes, and makes it easy to make secure, low-cost payments internationally.

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