How foreign currency works on credit cards

One of the great advantages of credit cards is that they can be used anywhere around the world.  American Express, one of the first payment cards (before they started offering credit cards) was aimed at the international business traveller and was an extension of their traditional business of issuing Traveller’s Checks.

Similarly VISA and MasterCard are accepted around the world, at nearly thirty million locations in around one hundred and twenty countries and they are issued by banks around the world.  They are also accepted at a wide range of ATMs, both of them approaching a million machines each.

One of the great things about a credit card is that it is possible to buy a good or pay for a service in the currency in which the product is offered, while being billed in dollars without any need to arrange foreign currency or travellers checks in advance (or hoping that the shop keeper will accept dollars, at a mark-up).

There is a further advantage in that with the internet it is now possible to pay for foreign goods in the foreign currency, which can mean that many goods are now cheaper than they would be if they were imported into America.  In some cases it may mean that a good is available when it would not have been available before.

This enormous advantage however does cost.  There are three ways in which a credit card can charge for foreign currency transactions; through the foreign currency conversion spread, the overseas transaction fee and the cash advance fee.  Not all of these are charged by all banks, but it is a good idea to be aware of the different costs if thinking of buying a good either abroad or from a foreign vendor.

The foreign currency conversion spread is the difference between what is charged by the credit card and what the credit card pays the vendor.  Most credit cards tend to have a good rate of exchange on their credit cards (charging roughly what the market is charging) but instead will have a fee that is a percentage of the fee.  This will apply to a card whether or not the card was used overseas; it only depends on whether the currency used was dollars.

Cash advance charges apply on ATM transactions, which are far more common with credit cards that are used abroad than when the cards are used in the US.  This will tend to be a separate, and higher, charge than any charge that is levied on domestic cash advances.

The overseas transaction charge is a charge that is over and above any conversion or cash advance fees.  It is not charged by all cards.