Overseas credit card use: What are the hidden fees?
Foreign currency fees on your overseas credit card spending can get quite confusing because most of us don’t deal with overseas transactions regularly, and they are usually in small print. When you finally receive your credit card statement, you only get to see 1 line; the transaction amount in foreign currency (JPY) and your billing currency (SGD).
Source: My credit card bill from Citibank
However, hidden in this 1 line are usually 3 separate fees; the currency conversion fee, the administrative fee, and the foreign exchange margin. In this example, your bank will take the foreign amount (JPY 27,000), convert it to USD then convert it to SGD (converted amount). The bank then applies the currency conversion fee from the card association (Visa / MasterCard) and its own administrative fee on the converted amount to arrive at the final figure of SGD 351.78, the figure you see on your credit card statement.
Note: The fees in this article refer to fees for completing your transaction in foreign currency (JPY). You should not complete your transaction in your billing currency (SGD) as it could leave you with a 3-15% higher transaction amount.
Fees and further details
(1) Currency conversion fee
All credit card transactions in foreign currency are subject to a currency conversion fee imposed by the card association, either as a direct charge to the consumer, or as a reimbursement charge reflecting the charge imposed on the bank by the card association. In other words, this is the fee imposed by Visa, MasterCard, American Express, UnionPay, JCB, etc. for using your credit card overseas. This fee is typically 1.0% on the converted amount.
(2) Administrative fee
This fee typically ranges from 1.5% to 2.5% on the converted amount, depending on the card association and card. For example, DBS charges 1.8% for Visa and MasterCard cards and 2.0% for American Express cards. UOB charges a 1.8% administrative fee for all its Visa/MasterCard credit cards except for its UOB PRIV Miles Visa/MasterCard cards, where it charges a 2.25% administrative fee. However, some banks may waive it for certain cards, like how CIMB waives it for its CIMB Visa Signature / Platinum MasterCard cards.
Here’s a typical breakdown, using DBS as an example:
The following table shows the total fees incurred (currency conversion fee by card associations + administrative fee by bank) when you pay in foreign currency. Now we can clearly see that each time you use your card overseas, you’re subject to fees of 1-3.5% on your transaction amount in total.
Source: Pricing & fees guide from various banks, *effective Dec-18 for Visa and Jan-19 for MasterCard
You may have noticed that we left out 1 fee. From the example using DBS, there is a category called foreign exchange rate, determined by Visa / MasterCard / American Express. What kind of fee is this?
(3) Foreign exchange rate
If you pay in foreign currency (e.g. JPY), the foreign exchange rate on your transaction is determined by the card association of your credit card (Visa/MasterCard/American Express). If the transaction is not in USD, the transaction amount is usually converted into USD first, then converted into SGD (exceptions exist, such as UOB converting AUD transactions directly into SGD). Since there isn't an explicit numerical fee imposed, a good way to assess this "fee" is to estimate your opportunity costs.
In the context of credit cards, your opportunity costs would be using a credit card from another card association (e.g. Visa vs. MasterCard) as card associations give different exchange rates. One common mistake is to compare the exchange rate against the interbank rate. This is not a fair assessment because interbank rates are not accessible to consumers, and thus should not be considered an opportunity cost.
From our study of historical exchange rates from different card associations, we found that MasterCard generally saves you ~0.5-1.0% in foreign exchange rates as compared to Visa and UnionPay across most currencies, at least 70% of the time.
Working through all the costs with an example
Let’s return to the first example and work through all the fees together. Here’s a transaction made in Tokyo on the 15th of June, 2017 with a Citibank Visa credit card.
Source: My credit card bill from Citibank
Amount in foreign currency: JPY 27,000
Indicative SGD/JPY rate by Visa: 78.902
Converted amount: JPY 27,000 / 78.902 = SGD 342.20
Final billing amount in SGD: SGD 342.20 + currency conversion fee of 1.0% + administrative fee of 1.8% = SGD 351.78
Interestingly, the average indicative SGD/JPY exchange rate from several money-changers in Singapore on the 13th of June, 2017 was 80.443 (assuming you change your currency 2 days before your travel/transaction). This means that if you paid in cash, the final amount in SGD would be equivalent to only SGD 335.64 (SGD/JPY rates were relatively flat those dates, so the difference was not due to exchange rate movements.) Was it worth paying an additional SGD 16 from using your credit card overseas? To most it may not be worth it, but that really depends on how you value the benefits from your card.
Having a good understanding of the different card fees allows you to make better comparisons when you’re deciding between different credit cards for overseas use, or even deciding between using cash and card overseas. However, costs should not be your sole consideration. Assess the benefits from each card and evaluate the net benefit. The card rewards (e.g cashback/miles) may more than offset the higher cost of some cards.
- How do you access whether the exchange rate you're getting is fair?
- What are your opportunity costs?
- Does Visa or MasterCard give better exchange rates?
- How do Visa and MasterCard determine exchange rates?
- What are the different fees when you pay in foreign vs. billing currency?
- How can you avoid the extra fees?