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If you’re traveling this summer, keep an eye out for this sneaky way you can lose money.
You probably know what foreign transaction fees are; these are charged when you use certain credit cards to make a purchase in a foreign currency. But there’s another way you could be unknowingly given a terrible exchange rate, even when you pay with a credit card that doesn’t charge foreign transaction fees.
When you make a purchase with your credit card or withdraw money from an ATM, you might see the option to be charged in the local currency or US dollars. While you might be tempted to choose US dollars for convenience, this often gives you a poor currency conversion rate.
This is called dynamic currency conversion — here’s everything you need to know.
Decline currency conversion when paying abroad
For example, at the time of writing this article, the Mastercard currency conversion rate for a US card to make a purchase in British pounds is roughly £1.24 to $1. So, if you use your US Mastercard to buy a £50 meal in London and pay in the local currency, you’d be charged $62.24.
Generally, credit card companies will give you close to the true exchange rate. So as long as you’re paying with a card that doesn’t add foreign transaction fees, you should get the best possible deal on your purchase, though American Express, Discover, Mastercard and Visa may have slightly different currency conversion rates at the time you make a purchase.
On the other hand, electing to use dynamic currency conversion at the point-of-sale system — in other words, paying in your home currency — often gives you a poor conversion rate. This is true even though the currency conversion is often branded as fee-free, because these point-of-sale systems often give you a worse foreign exchange rate, sometimes 5% or more above the market rate.
To make matters worse, some credit cards will still charge you the foreign transaction fee even if you opt to pay in US dollars. These are often between 3% and 5%, so you could unknowingly add up to 10% to the cost of your transaction abroad. And those fees can add up quickly.
Choose the local currency at ATMs, too
Note that you might also see dynamic currency conversion options when withdrawing money at an ATM. Here’s an example I recently ran into in the Czech Republic. The ATM gave me the option to withdraw cash in Czech koruna or US dollars, with the US dollar option having a 12% premium over the market exchange rate. There was an ATM fee, too, but thankfully that was covered by my bank account.
If you run into this same situation at an ATM abroad, select the local currency option. And before you leave for your trip, make sure you have a checking account that doesn’t add foreign transaction fees or have ATM third-party fees.
Use these credit cards to avoid foreign transaction fees
If you’re traveling abroad this summer, you should have a credit card that doesn’t charge foreign transaction fees. This could save you hundreds of dollars depending on how much you spend abroad, and you’ll earn credit card rewards at the same time.
These are a few of our favorite credit cards that do not charge foreign transaction fees, along with their annual fees and current welcome offers.
- Bilt Mastercard®: No welcome offer, but you can earn Bilt Rewards points when you pay your rent and make daily purchases. No annual fee (see rates and fees).
- Chase Sapphire Preferred® Card: Earn 60,000 bonus points when you spend $4,000 in purchases within the first three months from account opening. $95 annual fee.
- Capital One VentureOne Rewards Credit Card: Earn 20,000 bonus miles after you spend $500 on purchases within the first three months from account opening.
- Citi Premier® Card: Earn 60,000 bonus points after you spend $4,000 in purchases within the first three months from account opening. $95 annual fee.
Make sure to read our full guide to the best credit cards for international travel for more inspiration.
Bottom line
If you’re jet-setting abroad this summer, keep an eye out for dynamic currency conversion. This is often shown at ATMs and point-of-sale systems where you’ll be asked if you’d like to be charged in the local currency or your home currency. In almost all cases, you’ll come out ahead by selecting the local currency and letting your bank exchange the money for you.
And if you don’t have one already, consider applying for a credit card that doesn’t charge foreign transaction fees. The 3% to 5% foreign transaction fee can add up over the course of a long trip, leaving you with an added travel expense.
Looking for the best overall credit card? Find out which cards CNN Underscored chose as its best credit cards available right now.
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