Travelers: Say 'No' to Paying in Dollars
By Eva Norlyk Smith Ph.D.
May 20, 2013
I've taken credit cards abroad with me a few times, and some places ask me if I want to pay in euros (or whatever the local currency is) or in dollars. I don't know if one is better or worse than the other, or if there are costs involved, so I've always just paid in euros. But should I take the chance to pay in dollars? Are there any fees or ways it'll cost me in either case? — Linda
It may seem like a great convenience to pay credit card charges in dollars when traveling abroad, so you can track how much you've spent without constantly doing currency conversions in your head. But indeed, as you suspect, there are downsides.
The technical term for the automatic conversion of foreign currency charges into dollars at the check-out counter is dynamic currency conversion (DCC), and it's convenient, because the final amount is rung up in U.S. dollars at the point of sale. But there's one big difference between the conversion rates used in DCC and the rates used when paying in the local currency: The exchange rate used in DCC is not necessarily the prevailing interbank rate, but rather a rate set by the merchant.
As you might suspect, many merchants take advantage of this slight difference to pad the exchange rate in their favor. Exactly how much more you'll pay varies. Generally, the conversion rate will be 3 percent above the current exchange rate, but it could be higher.
Paying in the local currency won't always be free either — your bank may charge you a foreign transaction fee (generally a percentage of the transaction amount) for overseas transactions). However, that percentage may very well be lower than the rate the merchant charges for DCC. Assuming it is, you're better off paying in the local currency and paying the foreign transaction fee to your bank. Plus, although the costs of DCC may vary unpredictably by merchant, the foreign transaction fee your bank charges will not fluctuate.
Fortunately, you can avoid DCC. If a merchant is charging you in dollars or offering to convert the purchase into dollars, simply refuse and ask to be charged in the local currency. Not all vendors may ask, so check the receipt. If it shows only a dollar amount, that means that the merchant is using DCC. If this happens, ask for the purchase to voided and rung up again in the local currency. This will ensure that the transaction is converted by Visa or MasterCard using the current interbank exchange rate. The credit card networks require merchants to give consumers the right to refuse DCC. If the merchant won't cooperate, and has already charged your card, you'll have to dispute the charge with your issuer.
It's also getting easier to avoid paying foreign transaction fees on overseas charges. More and more card issuers are waiving the fee on all or some of their credit cards. Capital One has no foreign transaction fees on any of its credit cards. Discover has eliminated foreign transaction fees on its Discover It card, and other card issuers offer select credit cards without the fee. If you are in doubt, simply call your card issuer and ask if the fee applies to the cards you carry.
For the savvy consumer, it's fairly easy to stay clear of the extra fees. Traveling is expensive enough as it is, so why pay unnecessary surcharges for the pleasure of using your credit cards overseas?
Got a question for Eva? Send her an email.