What’s New With Overseas Plastic?

A reader recently asked us:

“With all the changes in credit card fees and charges these days, is there anything new since your last report for travelers who want to use plastic outside the U.S.?”

The short answer is, “Fees and charges haven’t changed much, but you may run into some unexpected new problems.” Here are the details.

How the System Works

The general principles of using plastic in foreign countries haven’t changed since our earlier Foreign Exchange 101 report. You never come out ahead with foreign exchange. The best you can do is break even, and your objective is usually to lose as little as possible—and plastic is often the best way to minimize exchange losses:

• When you use a MasterCard or Visa credit card overseas, the international MasterCard and Visa networks add a conversion fee of 1 percent and pass the charge, now in dollars, along to your account. Most U.S. banks add their own surcharge, typically 2 percent, for a total of 3 percent. This surcharge essentially for doing nothing, because the charge is already in US dollars by the time your bank receives it: The bank adds the 2 percent because it can, out of pure greed.
• American Express, which runs its own international network, adds about 2.7 percent, total.
• When you use a debit (ATM) card for cash outside the US, your bank adds some combination of a per-withdrawal fee up to $5, a conversion fee up to 3 percent, or maybe both.
• By contrast, when you convert travelers checks or currency you generally lose anywhere from 5 percent to 10 percent in various conversion fees and charges.

Thus, we still recommend credit cards for big purchases and debit cards for cash, and suggest you forget about travelers checks or exchanging U.S. currency. However, we see some minor changes in specific credit and debit card specifics. Here is the latest information we have, as of late January, 2010.

Credit Card Charges

When you use a credit card outside the US, your charge will typically originate in the currency of the country you’re visiting, and it’s handled as above. Fortunately, a few banks do not add a surcharge. Here are current charges for some of the larger card issuers:

Card Issuer	Foriegn Currency Surcharge	Dollar Purchase Surcharge
American Express	2.7 %	0%
Bank of America	3%	3%
BarclayCard/Juniper	2-3%	2-3%
Capital One	0%	0%
Citibank/Diners Club	3%	3%
HSBC	3%	3%
JP Morgan Chase	3%	0%
US Bank	3%	3%
USAA	1%	1%
Wells Fargo	3%	0%

As far as I can tell, no other big card issuer is as generous as Capital One, although USAA comes close. However, several of the other banks waive or reduce various fees and charges on some premium cards or for high-value customers, and many small banks and credit unions offer below-average exchange fees.

Occasionally, a foreign merchant charges you in US dollars rather than in local currency. Banks are inconsistent in their treatment of such charges: Bank of America, Barclaycard/Juniper, Citibank/Diners, HSBC, and USAA add the same conversion fee regardless of the currency, but AmEx, Chase, and Wells Fargo do not surcharge dollar billings.

Debit (ATM) Cards

Originally, the only extra charge you paid was a flat fee for each withdrawal from a foreign ATM, regardless of the amount of money you received. Now, however, some big banks add a conversion surcharge. Here are current charges for withdrawing local cash from a foreign ATM:

Card Issuer	Cost per Transaction	Exchange Surcharge
Bank of America (a)	$0	1%
Bank of America	$5	1%
Citibank	$1.50	1%
Citibank (b)	$0	1%
HSBC	$0	1%
JP Morgan Chase	$3	3%
US Bank	$0-$2	1%
USAA	$0	1%
Wells Fargo	$5	0%

(a) For ATMs owned by members of Global ATM Alliance
(b) For ATMs at overseas CITI branches

Obviously, the spread between the best and worst deals on debit-card withdrawals is 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 as much as when you exchange currency or travelers checks. Whatever you do, use a debit card, not a credit card, for local currency from an ATM. When you use a credit card to get cash, you’re on the hook for a number of extra fees and charges.

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Most debit cards are branded as MasterCard or Visa, so you can use them as charge cards to shop as well as for ATM cash. When you use your ATM card that way, most banks charge the same as on their credit card purchases.

The Compatibility Hassle

The biggest unexpected problem you’re likely to encounter is in the increasing incompatibility of cards issued by U.S. banks with the emerging systems overseas. As I reported earlier, some banks overseas are switching from the stripe-plus-signature system we use in the US to a smart chip-plus-PIN system for maintaining credit card security.

Merchants may say they can’t accept your strip-and-sign card. Usually, if you argue long enough, the merchant can find the instructions for accepting strip-and-sign cards—although that may require a hassle. Some travelers, however, find they can’t use their cards at all in the automated merchandising systems that are increasingly used. Most of the problems reported to me have been in Europe—especially France and Scandinavia—but some readers have reported problems in Brazil. Specific trouble spots include railway and transit ticket dispensers, toll-highway toll machines, and 24-hour gasoline pumps, but I’m sure there are others.

International MasterCard and Visa rules require all participating merchants to continue to honor US cards, no matter where they are. And the networks’ party line is that if you run into a machine that won’t take your card, “find an attendant” who can process your transaction the old-fashioned way. But fat lot of good the “find an attendant” recommendation does you when you need to pump some gasoline late at night and the nearest attendant is 10 miles away, sleeping peacefully in bed.

As far as I can tell, no U.S. bank currently issues chip-and-pin cards. Although some cards issued in the U.S. contain chips, they’re RFID chips and incompatible with the memory chips used in the foreign systems. Currently, the only way to get such a card is by opening an account in a foreign country.

At this point, the international networks really have no solution to this problem. And nobody in the financial world wants to talk about it. MasterCard and Visa simply parrot the “your card is good everywhere” party line. And the banks don’t want to say anything at all: In response to my inquiries, one big bank responded, succinctly, “We decline to comment on chip and pin cards.”

The Dollar-Charge Scam

“Charge in dollars” can seem like a good idea. But if you do, you face a possible scam: The merchant can use a lousy exchange rate in converting your charge into US dollars. As a result, you could wind up paying the merchant’s private currency markup in addition to the regular surcharge on your card, many of which add the surcharge even to dollar charges.

Increasing numbers of merchants are catching on to the additional profit they can gain this way. The conclusion: Avoid any billing in dollars.

Buyers’ Guide

My overall recommendations remain the same as they’ve been for several years. To minimize your exchange losses:

• Put big charges on credit cards. If you travel outside the US a lot, consider getting a Capital One card, with its $0/0 percentsurcharge (and a reasonably generous reward program). Otherwise, USAA and many smaller banks and credit unions charge only 1 percent. Even cards with a full 3 percent surcharge are still an efficient way to pay outside the US.
• Use your debit (ATM) card for whatever local currency you need. If your itineraries permit, use one of the few no-fee systems. Otherwise, minimize your losses by withdrawing in fairly large amounts each time.

In short, keep using plastic, but make sure it’s the right plastic.