Cards without Foreign Transaction Fee Aren't Free
By Eva Norlyk Smith Ph.D.
April 11, 2012
Credit cards offer a way to pay for travel expenses without carrying wads of cash or dealing with currency conversion fees. However, many consumers return from their travels to discover, too late, that the convenience came with a price tag — a 1 percent to 3 percent foreign transaction fee added to all overseas credit card charges.
More card issuers, however, have been dropping foreign transaction fees on their credit cards, which is good news for Americans heading overseas this summer. Yet these cardholders can still expect to pay in the form of other card fees.
Banks dumping fees
In the past, consumers looking for credit cards without foreign transaction fees had few choices. A July 2010 study by Pew Trust found that more than 90 percent of bank credit cards featured a 2.7 percent to 3 percent foreign transaction fee.
Capital One has long been known for waiving foreign transaction fees on all its cards.
“It has been our longstanding policy not to charge any foreign exchange fees on any of our credit card products,” writes Sukhi Sahni, senior communications manager at Capital One in an email. “We do not pass on the 1 percent fee assessed by Visa or MasterCard (we absorb it), nor do we assess one of our own.”
Now, however, as card issuers are looking for more ways to be competitive, many are waiving foreign transaction fees on select credit cards, and some are eliminating them on all their card offerings.
Discover dropped foreign transaction fees on all its credit cards in November 2011. Around the same time, Pentagon Federal Credit Union announced that it was also dropping the fee on all its cards. Both Chase and Citi joined the fray by eliminating the fee on an increasing number of their credit cards as well.
American Express dropped the foreign transaction fee on its Platinum Charge Card, which features a $450 annual fee, but still charges a 2.7 percent foreign transaction fee on all its other cards. Many credit unions feature lower transaction fees, adding only the 1 percent surcharge levied by Visa and MasterCard to foreign transactions. Most other card issuers, including Bank of America, HSBC, U.S. Bank and Wells Fargo still charge the full 3 percent fee on overseas charges.
Issuers make up any loss in other ways
If you have a card that waives foreign transaction fees, don't bring out the champagne just yet. While credit cards without foreign transaction fees are easier to come by, there are still plenty of catches. For some issuers, the foreign transaction fee is predominantly waived on premium credit cards, many of which come with steep annual fees as high as $450. Of course, many premium cards also feature added rewards benefits, which, for some, will make the annual fee worthwhile. However, unless you were planning to take advantage of those benefits already, it might not be worth paying a premium annual fee to save 3 percent on credit card charges when traveling.
It may be a while before consumers see more issuers dropping international transaction fees on cards without annual fees. That's because 1 percent of the fee is a non-discretionary charge levied by MasterCard and Visa for processing overseas transactions. In short, in addition to dropping their own 2 percent surcharges, card issuers eliminating foreign transaction fees would be forced to cover this 1 percent charge out of their own pockets.
Lucky enough to find a card that has no annual fee or foreign transaction fee? Even they may not offer a free ride while you're abroad. For example, while most Discover cards come without annual fees, Discover cardholders may find the dropped foreign transaction fee to be of limited benefit. Discover is accepted in far fewer locations overseas than Visa or MasterCard, and cardholders will likely not be able to use a Discover card as their primary credit card when traveling.
Similarly, while the Pentagon Federal credit cards are attractive (they feature both below-market interest rates and no annual fees), you have to be a member of PenFed to apply. Would-be members who don't meet eligibility requirements must join one of PenFed's partner charity organizations – and make a nominal, one-time donation. Not all consumers will want to jump through such hoops.
Before applying for a credit card with no (or low) foreign transaction fees, it's important to look at the whole picture. Use the chart below to see how your current credit cards stack up, and which cards may offer the most attractive solution for your travels. Keep in mind that terms will vary, depending on your creditworthiness.