In case you had any doubts that credit card firms would find ways to make up for revenue lost through recent reforms passed by Congress, let me put them to rest. Online shoppers take note: It's now possible that you'll be charged a foreign transaction fee on some purchases without ever leaving the U.S.
Bil Corry of Indiana spotted the new fee while carefully reading mail from Bank of America recently. Corry is an Internet Age consumer. He shops online and doesn't limit himself to U.S. companies. By shopping around the planet, he can save a little money. He buys Web- hosting services from a company in Amsterdam and registers domains with a company in France. But soon, Bank of America will be eating into those discounts. Corry recently received a letter saying the bank would help itself to 2 percent of each transaction he had with a foreign company -- even if he never leaves the U.S. and even if the transaction is completed in U.S. dollars.
There's nothing new about credit card firms carving themselves a big chunk of change from foreign travelers. Starting in 2005, overseas vacationers and business travelers noticed their monthly statements were peppered with these fees, which can add as much as $4 to every $100 stay at a hotel. But foreign transaction fees date back to the previous decade, when card issuers hid them in currency conversion calculations, baking an extra cut into their exchange rates. An epic class-action lawsuit followed, and the credit card associations were ordered to issue a whopping $800 million in refunds. Banks also were ordered to change their ways – the fees must now be clearly spelled out on billing statements. It's too late to claim any refund money, but you can learn more here: http://www.ccfsettlement.com/
The rationale behind the foreign transaction fee is this: The bank had to pay for currency conversion and also do some fancy accounting work. But for that reasoning to hold up, consumers must literally be overseas and literally buy things in other currencies. Well, forget that.
Here's how Bank of America explains the new fee in a letter to consumers sent in April:
"We are expanding the definition of 'foreign transactions' to include transactions in U.S. dollars if they are made or processed outside of the United States. ... Foreign transactions include, for example, online purchases from foreign merchants."
Bill Hardekopf, who operates the credit card information site LowCards.com, thinks the rationale behind the new policy is simple: increased revenue.
"I think we will see this with the credit card reform, other fees that will crop up that we don't even know about right now," he said. "(Congress) didn't really put the handcuffs on fees like they did interest rates."
Hardekopf says that Discover, Citigroup and Bank of America all jumped on the expanded definition of foreign transactions earlier this year. U.S. consumers who book online travel from home with foreign airlines have been particularly hard hit, he says.
"It means shopping online could cost you an additional 3 percent of your purchase if that online merchant is based in another country," he said. "If you purchase a high-priced item, that additional fee can be quite a surprise."
It's this element of surprise that most concerns Corry, who always carefully reads his fine-print mail. With merchants from around the world just a click away -- and nearly all accepting Visa and MasterCard -- consumers don't always know where a Web company is based, he said.
"In this day and age of global commerce, I'm wondering how many people will even realize that their purchases are being processed outside of the United States?" he said. "They may very well associate 'foreign transactions' as meaning you have to physically travel to another country and use the credit card in person and may not realize that online transactions will also count."
Red Tape Wrestling Tips
The good news: Not all cards charge 3 percent for foreign transactions. Some hit consumers with only a 1 percent fee. That can be a dramatic difference at the end of a vacation. Simply pulling out the "right" plastic during $2,500 vacation would save a consumer $50 ($25 vs. $75 in fees). Better still: One major card issuer -- Capital One -- charges no foreign transaction fees at all.
This new foreign fee flimflam is yet another reason to pick your plastic carefully when shopping. The old advice about double-checking your card's fee policy before traveling overseas now applies to anyone who shops online. Take a moment now to call your bank or visit its Web site and see how much you might get charged for buying something from a foreign company. Know that bank operators aren't always well-informed. They might give the wrong answer, and they might know the fee by any of the following names:
- Foreign Transaction Fee
- International Transaction Fee
- Currency Conversion Fee
- International Conversion Fee
BankRate.com offers a handy card-by-card breakdown of conversion fees.