If you’ve ever used your credit card while travelling overseas, you likely know that card issuers add a 2 to 3 percent foreign transaction fee for purchases made in other countries. While the foreign transaction fee isn’t exactly popular among frequent travelers, it is arguably justified, particularly since you’d be paying an exchange fee (albeit smaller) if you used cash instead. However, how would you feel if you got charged a foreign transaction fee for your credit card transactions, even though you never left the country or even the comfort of your home?
For many card users, this is becoming a reality because of a recent redefinition of what a “foreign transaction” is. Both Visa and MasterCard now charge the banks that issue their credit cards a processing fee, (a.k.a. International Service Assessment (ISA) fee), for any transaction that involves a bank in another country than the cardholder’s country of residence. In short, going forward it doesn’t matter where the cardholder is physically present; if a credit card transaction is processed by a foreign bank, the ISA fee will be assessed.
For example, let’s say you are planning a vacation in Thailand and purchase an airline ticket online in the US with an overseas carrier. If that airline uses a foreign bank to process the transaction, the transaction will be assessed an ISA fee by Visa or MasterCard (MasterCard refers to it as a cross-border transaction fee). Similarly under the new rule, if you’re using an Internet service, such as playing online poker or subscribing to an overseas website service, you could end up paying a foreign transaction fee if the bank processing the fee is located overseas.
Visa and MasterCard charge this fee to the bank issuing the credit card for processing the transaction, and it’s the bank’s decision whether or not to pass it on to the cardholder. The fee may be as little as 0.8 percent of the purchase price, however, in a world where international boundaries for transactions matter less and less, such fees can add over time, particularly for people frequently making credit card transactions processed through foreign banks.
In addition, foreign transaction fees on charges you make when you travel outside the US are becoming more standard across the board. Visa and MasterCard add a 1% exchange fee for processing the transaction, and most banks tack on an additional 1 or 2%, bringing the total fee up to 2 to 3%. Travelers in the past could avoid the fee by using a Discover card (where accepted) for overseas purchases, but Discover recently initiated a 2% charge for transactions made overseas. As of this writing, that leaves Capital One cards and some Charles Schwab cards as the only credit cards that do not charge a fee on foreign transactions.
