Tourists and travel enthusiasts often visit other countries and may use their credit cards while traveling for making transactions. These could be online international purchases for advertising, hosting, software etc. too. These come under international payments made through the card. The credit card helps the users carry out a secure transaction avoiding cash payment or cheques, along with the ease to make payments through their card. However, this comes at a cost known as the credit card foreign transaction fee or the forex charges. Therefore, any travel abroad may encumber these charges which are usually mentioned somewhere in the terms and conditions of the credit card being used for international transactions.
What is the Credit Card Foreign Transaction Fee?
A credit card foreign transaction fee is charged by the credit card issuing companies when the credit card users use the card to make a transaction in foreign currency or through a foreign bank. This means that the credit card company takes a certain percentage of the total amount of transaction made just to let the transaction go through. The percentage charged is generally around 3.5%% or above. The credit card foreign transaction fee works like a sort of surcharge on the credit card statement and is accrued only when the transaction is made through a foreign bank or when the currency used is not from the country it has been issued in.
For example, when a traveler from India travels to the U.S.A., the currency is dollar and therefore, it attracts credit card foreign transaction fee. This credit card foreign transaction fee has two parts to it – Network fee and Issuing Bank fee. This is generally not shown separately to avoid confusion among credit card users.
The Network fee, also known as the Currency Conversion fee, is charged by the network associated with the credit card. The currency conversion fee, irrespective of the type of credit card, is levied on all such transactions. The Issuing Bank fee is charged depending on the type of credit card used by the user. This means that the credit card issuer has added an extra charge over the network fee. However, there are credit card issuers like SURE which add no such fee and even absorb the network fee so that the credit card user does not have to pay extra for any foreign transaction. The credit card foreign transaction fee is usually taken for the conversion of the denomination of another country. They can also be accrued while online shopping if the trader is from a foreign country and the consumers purchase anything from them using a credit card. These are also called foreign purchase or foreign currency transaction fees.
How Does the Credit Card Foreign Transaction Fee Work?
The forex charges or the credit card foreign transaction fee is calculated by the credit card issuing corporation and is generally represented as a percentage of the entire foreign transaction amount. Generally, most banks settle this rate at about 3.5% of the transaction amount. Another addition is the GST which charges 18% of the credit card foreign transaction fee. Although this seems to be a small percentage, it is accrued each time the credit card is used outside the country or deals in foreign currency, thus accumulating gradually. Therefore, if the credit card owner is a travel enthusiast or is habituated to ordering goods or items from foreign sites online, it might not be wise to choose a credit card which levies credit card foreign transaction fee. This is because the foreign transaction fee might become exorbitant if you make online purchases from foreign sites or travel abroad frequently. It might be better for the credit card user to look for a credit card like SURE which does not charge any forex charges.
When is a Foreign Transaction Fee Charged?
The credit card foreign transaction fee might be levied in the scenarios given below:
- Online purchases or transactions that have been made in a foreign denomination or currency.
- Retail transactions carried out outside the country.
- Credit card transactions made in India wherein the POS machine has been linked to an account abroad.
- Cash Withdrawals made at the ATMs outside the country.
- Any transaction that has been made in foreign currency.
How Much is the Credit Card Foreign Transaction Fee?
In general, networks like MasterCard and Visa levy a credit card foreign transaction fee of 1% on the total amount of transaction. But there might be credit card issuers which accrue extra charges on the same, increasing the percentage from 1-1.5% to 3% and more. This is not highlighted specifically for the customer and is added to the total fees. The percentage of credit card foreign transaction fee can vary for different banks and credit card issuers. The credit card issuers have to necessarily disclose any fee or charge that might be levied on foreign transactions right at the time of issuing the card to the customer. If this is not done, the credit card issuer may have to pay an amount of settlement to the credit card user. However, this rarely happens and the forex charges are mentioned in the credit card agreement terms and conditions. Therefore, it is important for the customer to give a thorough read to the same to gain information about the credit card foreign transaction fee. This information is also usually provided on the website of the bank or credit card issuing authority.
What Happens When Users Make Foreign Transaction?
Looking at it from a bank’s point of view, there are just two types of foreign transactions that can be carried out.
- Foreign transactions made in US Dollars
- Foreign transactions made in other currencies
Foreign Transactions in US Dollar
While making a transaction in the US Dollar, the Indian credit card of the traveler automatically converts the total amount in Indian currency or Rupee. After this, the foreign transaction markup fee is also added to the converted amount. The fee is also paid as the Forex Markup Fee. For example, if a credit card user made a purchase worth 200 USD and the exchange rate stands at 1 USD = INR 70, the total amount will be INR 14000. If the foreign exchange markup fee has been set at 2% of the transaction amount, the markup fee will be Rs. 280. Apart from this, a GST of 18% will be levied on Rs. 280 i.e the GST charged will be Rs. 50.4.
Foreign Transactions in Other Currencies:
When a credit card user carries out any transaction in a currency other than the US Dollars, then the transaction amount is firstly converted to US Dollars for some banks. Following this, the amount is converted to the currency of the country the user is in. At this point, the markup fee is levied on the amount and the total amount is displayed on the credit card statement of the customer.
Currency Conversion Fee
It is important to understand the currency conversion fee along with the credit card foreign transaction fee. The people who have traveled abroad know that the exchange of local currency for the currency of the particular country they are traveling to might turn out to be expensive. The use of ATMs outside the country or even at airports can lead to the credit card user paying additional charges. Each time the user swipes a card abroad, there is a fee added to the entire amount for converting the amount to the currency of the country they are in.
The primary difference between the credit card foreign transaction fee and the currency conversion fee is that the latter is not charged by the credit card issuer but by the payment processor of the credit card. This usually stands at 1% and is meant for the credit card issuer but is shifted to the credit card user. Therefore, the credit card user pays both the credit card foreign transaction fee and currency conversion fee for every foreign transaction. The currency conversion fee is added to the foreign transaction directly and the user is not generally aware of the rate at which the fee is charged.
If a credit card charges the credit card foreign transaction fee or forex charges, it will be included in the terms and conditions for the card. However, there are some cards which do not add any credit card foreign transaction fee to any purchase made abroad or online on foreign sites. Therefore, for any credit card user planning to travel abroad, it would be better to apply for a card with no transaction fee if the other cards that they carry add this fee. This should be done some months in advance so that there is time for approval, setup and receiving of the card.