Not too long ago, charging your way through a vacation abroad was the way to go. That's because credit cards have more favorable exchange rates and fees than banks and exchange bureaus. But new markups have made the charge-it strategy trickier.
Many credit-card issuers have tripled the charges for foreign billings. They've been quietly adding new fees for the past few years--so quietly that consumers have sued Visa, MasterCard, and American Express, saying the markups were not properly disclosed. (Card issuers are now starting to break out the extra charges on statements.)
Many credit-card issuers have tripled the charges for foreign billings. They've been quietly adding new fees for the past few years--so quietly that consumers have sued Visa, MasterCard, and American Express, saying the markups were not properly disclosed. (Card issuers are now starting to break out the extra charges on statements.)
Despite the rising costs, credit cards remain the best way to pay when you're crossing borders, if you bring the right ones (and, of course, if you pay off your bill every month). Also pack an ATM card and some traveler's checks and foreign currency for smaller purchases. All payment methods have their costs; here's how to keep them to a minimum:
Pay with the right plastic. Most major credit-card issuers that have increased fees have added a 2 percent markup to Visa and MasterCard's 1 percent currency-conversion fee. Avoid the 3 percent trap by using cards issued by the many small banks and credit unions that don't add markups. Another option is American Express, which charges a flat 2 percent. Discover Card charges no fees for foreign billings, but outside the U.S. it's only accepted in parts of Canada, the Caribbean, and Mexico.
(Whichever card you use, avoid cash advances. Fees can exceed 5 percent, plus the interest rate may be higher than what you'd pay for regular credit-card purchases.)
Pay with the right plastic. Most major credit-card issuers that have increased fees have added a 2 percent markup to Visa and MasterCard's 1 percent currency-conversion fee. Avoid the 3 percent trap by using cards issued by the many small banks and credit unions that don't add markups. Another option is American Express, which charges a flat 2 percent. Discover Card charges no fees for foreign billings, but outside the U.S. it's only accepted in parts of Canada, the Caribbean, and Mexico.
(Whichever card you use, avoid cash advances. Fees can exceed 5 percent, plus the interest rate may be higher than what you'd pay for regular credit-card purchases.)
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Some overseas merchants will convert your bill to dollars. That service would seem to erase transaction fees, but it could cost you more. Visa now charges its 1 percent fee on foreign purchases made in dollars. MasterCard will introduce similar fees in October. In addition, retailers may tack on fees for converting charges into dollars. Rent a Hertz car overseas and the company will convert your bill into dollars and charge you 2.5 percent.
Watch out for ATM fees. Debit cards offer easy access to cash through ATMs and the same good rates as credit cards, but you could get hit with charges as high as $5. Some smaller banks and credit unions offer no-fee foreign ATM use, although you'll likely pay Visa or MasterCard's 1 percent fee. The same goes for Citibank, as long as you use the bank's own ATMs around the world. And with a Bank of America debit card, you'll get free access to its affiliates' ATMs in Mexico, Europe, Canada, and Australia. If your bank doesn't offer free or cheap foreign-ATM access, cut fees by making fewer withdrawals of larger amounts.
Stored-value cards are a safe option to debit cards because they're not linked to your bank, so they protect you from having personal accounts cleaned out. You can buy them from banks, credit-card companies, travel agents, and AAA. But you'll pay up to $15 to buy the card and as much as $5 to reload it. ATM and currency-conversion fees also apply. And you may not be able to use those cards to reserve rental cars or rooms, to make phone calls, or to pay for gas at automated terminals.
Keep traveler's checks and cash on hand. They don't offer the same good exchange rates as credit cards, but traveler's checks are a backup source of cash. I know travelers who were stranded in Italy during the power outage of 2003, says Tom Tucker, senior vice president at Travelex Americas, a unit of Travelex, the currency-exchange company. When the systems were down, they were still able to use traveler's checks.
Avoid exchanging your traveler's checks in hotels, which tend to have the worst exchange rates and fees. Instead, try local banks and shop around for good rates at exchange bureaus.
That leads us to our final advice: Take along some local currency, which you can order from a bank. That way, you'll have pocket change on hand when you arrive at your destination. And cash, of course, is accepted everywhere.
Watch out for ATM fees. Debit cards offer easy access to cash through ATMs and the same good rates as credit cards, but you could get hit with charges as high as $5. Some smaller banks and credit unions offer no-fee foreign ATM use, although you'll likely pay Visa or MasterCard's 1 percent fee. The same goes for Citibank, as long as you use the bank's own ATMs around the world. And with a Bank of America debit card, you'll get free access to its affiliates' ATMs in Mexico, Europe, Canada, and Australia. If your bank doesn't offer free or cheap foreign-ATM access, cut fees by making fewer withdrawals of larger amounts.
Stored-value cards are a safe option to debit cards because they're not linked to your bank, so they protect you from having personal accounts cleaned out. You can buy them from banks, credit-card companies, travel agents, and AAA. But you'll pay up to $15 to buy the card and as much as $5 to reload it. ATM and currency-conversion fees also apply. And you may not be able to use those cards to reserve rental cars or rooms, to make phone calls, or to pay for gas at automated terminals.
Keep traveler's checks and cash on hand. They don't offer the same good exchange rates as credit cards, but traveler's checks are a backup source of cash. I know travelers who were stranded in Italy during the power outage of 2003, says Tom Tucker, senior vice president at Travelex Americas, a unit of Travelex, the currency-exchange company. When the systems were down, they were still able to use traveler's checks.
Avoid exchanging your traveler's checks in hotels, which tend to have the worst exchange rates and fees. Instead, try local banks and shop around for good rates at exchange bureaus.
That leads us to our final advice: Take along some local currency, which you can order from a bank. That way, you'll have pocket change on hand when you arrive at your destination. And cash, of course, is accepted everywhere.
Important Update
September 2005
In June 2005, Visa suspended its 1 percent charge on foreign transactions made in U.S. dollars. Instead, Visa will charge the fee only if your card issuer bills you in a foreign currency.
This may make Visa a better choice than MasterCard for travelers venturing beyond U.S. borders, because MasterCard will begin enforcing a 0.8 percent fee in April on foreign purchases made in U.S. dollars. MasterCard and Visa both charge a 1 percent conversion fee for all purchases made in a foreign currency.
Copyright © 2002-2007 Consumers Union of U.S., Inc.
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