Subject: Re: Credit Cards Abroad

Unfortunately, I think Mike in Madison is correct about the trend for almost all U.S. banks to begin tacking on an "unearned" fee on all forex transactions. There is no reason for the banks to grab an extra 2% or 3% of foreign charges, except that they can. It is also not easy for the average consumer to figure out how their final foreign exchange charges break down.

To clarify things, the credit card companies (VISA, MasterCard, Amex, etc.) normally charge 1% to make the conversion from a foreign currency to the home currency. This is expected and reasonable, since this is about what it costs them to deal in the interbank foreign exchange market. When the final charge (already converted into $) is processed by the bank (Citibank, Chase, MBNA, Capitol One, etc.) that issues the credit card, these banks have all decided to now add on an additional 2% to 3% fee. So your final foreign exchange "fee + tax" can range from 3% to 4%.

The issuing banks carry no foreign exchange costs or risks, (only the credit card companies do.) When the banks add on an additional percentage to the foreign charge, it is equivalent to them adding a 2% or 3% fee to all your domestic charges. They are doing nothing to earn this fee, and that is the essence of the problem.

There appear to be a few alternatives, still. But they are rapidly dwindling as even the better banks are falling into lockstep on this policy-- MBNA and Capitol One Bank are both imposing a 3% forex fee in the near future. A credit card issued by a Credit Union seems to be the best bet these days; most credit unions don't add on any forex fees.

Finally, there is a very lengthy thread (21 pages) on this topic on the Flyertalk forum:

Many of the posts discuss credit card alternatives, but most seem to require an affiliation with an insurance company (e.g. USAA), a credit union, or a university. If this issue is bothersome to you, it's worth scanning the thread for suggestions on how to avoid these new, unwarranted fees. The most useful information seems to be at the end of the thread.

Joel, in Chicago