After a nice meal on an international vacation, the server presents you with the credit card machine to pay. You insert your card, and the machine asks an important question: do you want to pay in the local currency or in U.S. Dollars (USD)? Choose incorrectly, and you could wind up paying way more for your meal than you have to. So which is the correct answer?
Always choose to pay in the local currency―here’s why.
Currency Conversion Fees
When you make a credit card charge abroad, you’re going to eventually have that charge converted back into USD, either at the point of sale or back at home by your credit card company for your final bill. The difference is that if you opt to convert immediately, the merchant will charge you an additional Dynamic Currency Conversion (DCC) fee―on top of any foreign transaction fees charged by your credit card. The DCC is usually around 1 percent of the transaction.
Additionally, the currency exchange rate charged at the point-of-sale is often significantly worse than the one that will be used by your credit card company. One European study found that converting a purchase at the time of sale can result in exchange rate markups of 12 percent compared to the standard exchange rate. Large credit card networks (like Visa or Mastercard) generally negotiate a very good exchange rate, and so you’re always better off having your credit card do the conversion rather than the merchant.
Foreign Transaction Fees
You might think that you’re dodging the foreign transaction fee charged by many credit cards if you’re converting to USD at the point of sale, but credit cards still consider a transaction made abroad (no matter what the currency) to be a foreign transaction, meaning you still get hit with the fee, which is often around 3 percent of the purchase price.
You should definitely have a credit card that doesn’t charge foreign transaction fees, even if you only use it when you’re abroad. There are many travel-themed credit cards that offer no foreign transaction fees out there. If you’re looking for a no foreign transaction fee (and don’t want to pay an annual fee for a credit card), Capital One doesn’t charge foreign transaction fees on any of their credit cards.
Always use a no foreign transaction fee credit card when traveling abroad, and never accept the conversion to USD at the time of purchase. You’ll save significant cash (up to 15 percent) this way.