Beware of the new credit card scam on foreign purchases

Despite some recent changes, credit cards remain your best option for large purchases such as airfare, accommodations, rental cars, and big restaurant bills when you're traveling outside the U.S. But you'll find some significant differences in exchange fees and charges among major cards, and a new "dynamic conversion" option that's bad news all around.

The best limit will cut your conversion losses to no more than one percent of the total, while the worst can add more than three percent to each exchange transaction; in a few cases, merchants can add even more. Here's a rundown of current credit-card fees and charges imposed by some of the larger U.S. banks and card issuers.

The best cards, issued by Capital One, calculate your foreign charges at wholesale exchange rates, with no surcharge, so you literally lose nothing. Almost as good are MasterCard and Visa cards issued by HBSC, USAA, and Washington Mutual, among others, that add only a one-percent conversion fee imposed by the international MasterCard and Visa networks.

MasterCard and Visa cards issued by most other big banks, including Bank of America, Citi, Juniper, MBNA, US Bank, and Wells Fargo, add three percent to all foreign purchases. Chase adds three percent to cards formerly issued by Bank One (which Chase just acquired) and 3.5 percent to its own "legacy" cards; the bank says it is in the process of rationalizing the differences. All of the bank cards that earn miles in airline programs surcharge at three-percent or more.

Among the travel and entertainment cards, American Express adds about two percent to foreign billings, while Diners Club (now co-branded as MasterCard) adds three percent. Discover, with its limited acceptance outside the U.S., is not a big factor in foreign conversion.

As I've noted before, any surcharge over one percent is a pure gouge; banks add it because they can, not to provide any incremental value to the transaction. Now, however, you may run into special situations that can increase your loss well above that three-percent mark.

"Dynamic conversion" is a new option that allows foreign merchants to calculate your bill and charge you in U.S. dollars rather than local currency. The scam is that each merchant sets the local conversion rate, with no bank control on the exchange rate any given merchant might use. Moreover, even if you're billed in U.S. dollars, your bank still adds its own foreign-billing fee. My recommendation: Never accept dynamic conversion or a merchant's offer to bill you in U.S. dollars. Instead, insist on being billed in local currency. Three percent is enough of a gouge; you don't need to add a merchant's gouge on top of the bank's.

Australian banking regulations now allow merchants to add whatever additional fees they wish on credit card purchases. These regulations are not specific to foreign exchange; they apply to Australians, as well. But the net effect is to add an unknown surcharge to any credit card charge in Australia, which—in the case of American visitors—would be in addition to whatever their banks add for foreign charges. When you travel in Australia, always ask how much a merchant is adding before you decide whether to use your card.

Clearly, your best bet is to use one of the credit cards that limits your exchange loss to one percent or less. If, however, you prefer to use a card that surcharges by three percent—one that earns miles in your airline program, for example—you still lose less than if you exchange currency or travelers checks.