Banking 101: Understanding Debit Card Foreign Transaction Fees

Traveling abroad can be wonderful, but it also can be expensive. Debit cards and credit cards often charge foreign transaction fees on international purchases.

“It can be a nasty surprise when you get your bill at home and that’s tacked on to every single transaction,” said Tim Leffel, author of “The World’s Cheapest Destinations” and founder and editor of Perceptive Travel. “I learned my lesson the hard way.”

We’ll discuss foreign transaction fees as they relate to debit cards and provide ways to minimize the fees you’ll pay abroad.

What is a foreign transaction fee?

Debit cards (which are linked to checking accounts) and credit cards can charge foreign transaction fees on purchases in another currency or transactions that include a foreign bank. That means there could be a charge every time you use your card in another country — or even if you buy something from a foreign company while you’re in the U.S.

The total fee is often a combination of a fee charged by the card network (i.e., Visa and Mastercard) and one charged by the card issuer.

At typically about 1-3% of the purchase price, these fees could really add to your trip expenses. Consider that for every $5,000 you spend, you could owe another $150 if the foreign transaction fee on your card is 3%.

You can find out whether your debit or credit card charges a foreign transaction fee by reading the terms and conditions.

Foreign transaction fees are not the same as dynamic currency conversion charges, which may be levied by an overseas retailer if you ask to have your bill converted to U.S. dollars.

“While this might seem convenient, it’s often a big rip-off,” said Nick Brennan, frequent traveler and founder and CEO of prepaid SIM card site My UK SIM Card. “The conversion rate used is terrible. Make a point of telling the person serving you that you want to pay in the local currency.”

ATM fees add to the foreign transaction fee

Besides foreign transaction fees, many debit cards charge fees for withdrawals from foreign ATMs. Bank of America’s Regular Checking account, for instance, charges $5 for each transaction, plus 3% of the amount you withdraw. That doesn’t include possible charges by the ATM owner. Look for debit cards without these fees (we’ll provide some examples below).

If you use a debit card for a non-ATM transaction — to make a purchase at a store, for instance — you’ll still pay the foreign transaction fee but you’ll avoid an ATM withdrawal fee.

Banks with no debit card foreign transaction fees

One of the best ways to avoid debit card foreign transaction fees is to find accounts that don’t charge them. Here are some examples:

• Capital One 360 account holders don’t pay foreign transaction fees when using their debit cards abroad.
• Debit card holders with a Charles Schwab Bank High Yield Investor Checking Account aren’t charged foreign transaction fees. The account also provides unlimited ATM fee rebates worldwide.
• First Republic Bank customers with ATM Rebate Checking accounts won’t pay foreign transaction fees, according to a spokesman for the bank. You also won’t pay ATM fees worldwide, and the bank will refund any related fees charged by other banks.
• TD Bank customers won’t pay foreign transaction fees if they use their debit cards abroad. You will, however, pay $3 to use a non-TD Bank ATM, plus any fees charged by the ATM owner (note that TD Bank doesn’t have ATMs outside the U.S. or Canada). Users with TD Premier Checking who keep a minimum daily balance of $2,500 or more will have TD fees waived and non-TD fees reimbursed.

Debit card vs. credit card foreign transaction fees

Are credit cards a better deal? In general, both credit cards and debit cards have foreign transaction fees (or options without them). But travel experts recommend using credit cards over debit cards for foreign travel for a few reasons:

There are more protections. If there’s fraudulent activity on your credit card — or if your card is stolen and used before you can cancel it — your liability is limited to $50 after you learn about the loss. “Most of the time, if there’s fraudulent activity on a credit card, it’s not going to be an issue,” said Nick Serati, co-founder of travel site Thrifty Traveler.

Your checking account isn’t at risk. If you experience debit card fraud, those funds are going to come directly out of your checking account, Serati said, which can put you in a tight spot if you need that money for other expenses. If you report the card stolen before any unauthorized charges are made, your liability is zero, but it could take several days or longer for your bank to restore your account, which can be a massive inconvenience.

Travel cards come with other perks. You may be better off finding a credit card with no foreign transaction fees, such as the Venture® from Capital One® or the Chase Sapphire Preferred® Card. Both come with annual fees — though it’s waived for the first year with the Venture® from Capital One® — but the perks can pay for themselves. The Venture® from Capital One® offers 50,000 bonus miles once you spend $3,000 on purchases within the first three months of opening the account, plus up to $100 toward your TSA Precheck or Global Entry fees. The Chase Sapphire Preferred® Card offers 60,000 bonus points after you spend $4,000 on purchases in the first three months of opening the account. Neither card charges foreign transaction fees. If you’re looking for the best travel cards,MagnifyMoney — which, like DepositAccounts, is owned by LendingTree — could be a good start.

Other options to reduce fees

There are spending strategies you can follow to minimize the fees you’ll pay when you travel abroad:

Use cash. Cash transactions come with no foreign transaction fees. (And if you’re using cash, research suggests you’ll spend less overall anyway.) Get cash at the airport when you land and look for a debit card with low or no ATM fees, even internationally. For example, the Charles Schwab Bank High Yield Investor Checking Account boasts a great exchange rate. “I’ve used this in 20 different countries,” Serati said. The caveat: There’s always a risk of losing cash or being targeted by pickpockets, so withdraw cash strategically. It’s probably not the best idea to carry a week’s supply of cash at a time.

Make purchases before your trip. To the extent that you can, pay for larger purchases — hotels, rental cars, etc. — online or before you travel. Fewer of your expenses will be subject to fees if you pay for them while you’re in the U.S. “Traveling and having cash on you is going to be the cheaper option than swiping your debit card,” Serati said.

Bottom line on debit card foreign transaction fees

Although debit card foreign transaction fees used to be an assumed cost of traveling abroad, there are plenty of products available with no fees — either on purchases or at the ATM. Find the right cards or choose to use cash to avoid the bulk of the extra charges.

If you’re traveling abroad, make sure to call your debit card issuer before you go so it knows the foreign transactions aren’t fraudulent. Then, enjoy your trip.