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Foreign exchange 101, part two: Fees for credit card use


Last week, I [% 284490 | | compared the costs %] of using plastic, cash, and travelers checks when you travel outside the U.S. My conclusion: Plastic is best, but only if you use the right plastic. This week, I’ve prepared tables showing fees and charges assessed by some of the larger banks for both credit cards and debit (ATM) cards.

These tables are definitely a work in progress:

  • I’m continuing to add additional banks as I receive information from them.
  • Even among listed banks, charges are in constant flux.

I plan to update the data as soon as I receive information from banks. At this time, I’d like to hear from readers who have either corrections or information on other banks’ policies, and I’d also like to hear from any banks with corrections or information to share.

Credit cards

When you charge something outside the U.S. to a MasterCard or Visa, your charge is converted to U.S. dollars and billed to your account. The international MasterCard and Visa networks charge one percent for the exchange process, and bill the bank that issued your card for that amount. Typically, that bank rebills you for at least the one percent.

That part is all fine—one percent is much less than you pay through ordinary retail channels to exchange currency. The bad part is when your bank tacks on a surcharge of its own—these days, typically two percent. That surcharge is a pure gouge. Your bank performs exactly the same billing service it performs for ordinary dollar purchases in the U.S., at no extra fee. It adds the two percent out of pure greed—and because it can.

Fortunately, a few banks do not add a surcharge. The first table tells the story for some of the leading banks, in terms of credit cards issued, as well as for American Express (which adds about two percent).

Card issuer Foreign surcharge
American Express 2%
Bank of America 3%
Capital One 0%
Citibank 3%
Diners Club 3%
HSBC 1% (a)
JP Morgan Chase 3-3.5%
US Bank 3%
Washington Mutual 1%
Wells Fargo 3%

(a) On most cards

Recently, some card issuers have added two new wrinkles that, when taken together, can push the cost of credit-card purchases over the cost of exchanging U.S. dollars or travelers checks at an exchange bank:

  • Most banks that issue credit cards now add the foreign-charge surcharge to any billing that originates outside the U.S., even if it’s in U.S. dollars.
  • The international networks also now provide for “dynamic conversion,” where the local merchant converts your bill to U.S. dollars at the time of the purchase. The catch here is that the networks impose no requirements that local merchants use fair exchange rates. Merchants are free to use whatever phony rate they choose.

The result is an obvious double markup. You pay both the merchant’s currency markup and the bank’s surcharge. If the merchant uses an exchange rate that’s, for example, five percent below the wholesale rate, your exchange cost could total eight percent—five percent for the merchant plus three percent for the bank, an obvious gouge. Clearly, you should never accept dynamic conversion.

Debit (ATM) cards

When you use your debit (ATM) card to get local currency at an ATM outside the U.S., the international networks immediately calculate the exchange and debit your account in dollars. Until recently, the only extra charge you paid was a flat fee—usually $3—for each withdrawal, regardless of the amount of money you received. Lately, however, some big banks have (1) hiked the fee to $5 and (2) added a conversion surcharge. The second table shows data for a few of the largest banks, in terms of number of outstanding checking accounts:

Bank Cost per transaction Exchange surcharge
Bank of America (a) $0 1%
Bank of America $5 3%
Citibank (b) $0 1%
Citibank $1.50 1%
JP Morgan Chase $0-$3 (c) 0%
Wachovia $0-$2 (c) 1%
Washington Mutual $3 1%
Wells Fargo $5 0%

(a) At ATMs owned by members of Global ATM Alliance
(b) At ATMS in overseas CITI branches
(c) Varies by type of account

The table shows three ways to avoid a surcharge of more than one percent:

  • If you have (or open) an account with Citi, you can withdraw foreign currencies from ATMs at Citi branches outside the U.S. with no fee. Citi has branches in dozens of foreign countries. In some, it has retail branches throughout the country; in others, it has only one or two offices in one or two major cities. You can easily find out whether a Citi account will work for your trip by checking the worldwide branch locator on the Citi website.
  • If you have (or open) an account with Bank of America, you can withdraw foreign currencies from ATMs owned by member banks of the Global ATM Alliance with no fee: Scotia Bank in Canada, Barclay’s Bank in the U.K., Deutsche Bank in Germany, Paribas in France, and Westpac in Australia. All five have branches throughout their home countries. In other countries, however, a Bank of America debit card is a loser.
  • Many smaller banks—or bigger banks with elite-status accounts for some favored customers—add no fee of their own and agree to refund any fees that other banks apply, usually with a limit on the number of withdrawals per month.

Obviously, the spread between the best and worst deals on debit-card withdrawals is much wider than the spread among credit cards. The very best deals, such as Citi and the Global ATM Alliance, are as good as the best credit cards, while with the worst deals, you lose more than when you exchange currency or travelers checks.

Be clear about one additional fact: When you need local currency from an ATM, use a debit card, not a credit card. When you use a credit card to get cash, you’re on the hook for a number of extra fees and charges.

When you travel

My overall recommendation remains the same as it has been for years: To minimize your exchange losses, put big charges on credit cards and use your ATM card for whatever currency you need. Even with a surcharge, you lose less with plastic than by exchanging U.S. dollars or travelers checks. But that advance is now conditional: It’s valid only when you use the better credit card and ATM options and no longer as broadly applicable as before. Keep using plastic, but make sure it’s the right plastic.

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