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A foreign transaction fee is an administration charge or 'handling fee' that is charged by credit card companies when you use a credit card to buy goods or services in a foreign currency.
Also known as a 'currency conversion charge' this fee is intended to cover the cost of converting pounds sterling into the foreign currency to make the payment.
The foreign transaction fee is usually 2.75% of the purchase amount.
Foreign credit card usage fees
Alongside foreign transaction fees there are other fees that can be charged when using a credit card abroad or to pay for purchases in a foreign currency.
Costs to be aware of when using a credit card abroad can include:
- Foreign transaction fee - usually 2.75% though it can range from 0% to 3%.
- Cash transaction fee - this will be charged on top of the foreign transaction fee when making cash transactions abroad. Cash transactions include ATM withdrawals as well as buying foreign currency or traveller's cheques during or before your trip.
- Dynamic currency conversion - whilst not a charge made by the credit card issuer, certain retailers or companies abroad may offer you a dynamic currency conversion - in short, this entails the retailer converting your payment and charging you in pounds sterling instead of the local currency. Whilst this will remove the foreign transaction fee, it is usually more expensive so you should always choose to pay in the local currency.
Remember, foreign transaction fees and dynamic currency conversion can also apply to debit cards.
Avoiding foreign transaction fees
The most effective way to avoid foreign transaction fees is to avoid using your card to make transactions abroad.
However, in this day and age most people find that using their credit cards abroad is an effective and convenient alternative to taking cash or traveller's cheques.
Foreign transaction fees can make it expensive to use your credit card abroad, and those planning to do so should check with their card issuer with regards to what the foreign transaction fee is so that they do not get any nasty shocks when their credit card statement comes through the door.
The foreign transaction fee that is charged by each card issuer can vary, and there is usually a minimum charge - the average is around £2.00. After this the amount is charged by percentage depending on the size of the transaction, and on average is around 2.75%. As you can see, the more transactions that you make the more you will be hit with these foreign transaction fees, and they can really add up in the end.
It is also important to remember that if you are using your credit card to withdraw cash abroad you will also be charged a cash transaction fee, though this can be avoided by using your debit card to withdraw cash.
If you are planning a trip abroad or travel overseas regularly it is worth comparing credit cards for use abroad, as there are some credit cards that offer low foreign transaction fees or do not charge this fee at all, which could save you a small fortune over the duration of your holiday.
Currently, the best credit cards for use abroad are by the Post Office; with both versions of their credit card - the Post Office Classic credit card and Post Office Platinum credit card - offering commission free use abroad, i.e. they do not charge a foreign transaction fee.
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