Travelling overseas and taking a well-deserved international vacation is arguably the best way to spend your money. Credit cards make it really easy to travel and spend without being hassled with counting notes and fumbling with change. But there is also a downside to using credit cards on your travels if you aren’t the type to diligently manage your finances. Let’s understand this with an example.
You saved some money for a trip to Europe and you finally got to do it! Not only have you spent a good amount on traveling, but also on fine dining and extravagant shopping. Some of the unplanned expenditures were handled by your international credit card. You ensured that all the exchange rates were noted when the transactions were made andou also calculated the bill that you were going to get with your credit card statement.
After some time, you came back home and started living the everyday life blissfully unaware that on its way was your credit card statement with the bill. Prepare yourself for the shock of your life as the amount you calculated is probably nowhere near the amount you owe the bank, as the bill will inevitably overshoot by 5% to 6%..
There are 3 types of charges involved. These are as follows:
Foreign Currency Conversion Fee – Since you hold an Indian credit card, the balance that you have on the card is in Indian currency. When a transaction is carried out using your Indian credit card, then a conversion fee will be charged. Let’s say you spend in Euros using your Indian credit card. A conversion fee will be applicable for converting INR to EUR. MasterCard and Visa charge a fee of 1% to 2% of the foreign currency exchange. Any amount that is in excess becomes the bank’s small margin profit.
Foreign Transaction Charge – A Foreign Transaction charge is applicable for almost all the banks like ICICI, SBI, PNB, HDFC, Citibank, etc. This is nothing but the fee for cash withdrawal. It forms 2.5% to 3.5% of the transacted amount. This fee is applicable irrespective of currency, cash withdrawal or transaction amount.
Cash Advance Fee – Cash advances can prove to be costly, even when you do it in India. If you are using your Indian credit card for cash withdrawal overseas, then it is obviously going to cost you more. Every time you withdraw cash using your Indian credit card in a foreign country, a fee of 1% to 4% will be charged. A standard cash withdrawal fee will also be applicable along with the overseas cash withdrawal fees.
Why does the value on your credit card statement differ from the figure that you had in mind?
The entities that are involved in a transaction apply additional charges for any overseas credit card transaction. The first entity is the issuing bank like ICICI or SBI. The second entity is the credit card company like MasterCard or Visa.
Why is the additional fee applied?
The add-on costs and charges are associated with currency conversion. This is the primary reason why an additional fee is applied. Small margin profits of the issuing bank and MasterCard/Visa are another reason why the additional fee is applied.
The exchange rate that is applicable to a particular transaction is the rate as of the settlement day, which is when MasterCard and Visa determine the amount of settlement to be exchanged between the issuer and the acquirer. Thus, the date of settlement is prior to the actual transaction date. So, the exchange rate that you had in mind while calculating all your expenses might differ from the actual transaction rate. This can also happen as merchants report your transaction to MasterCard or Visa after a day or two after the transaction. The calculation of the exchange rate is done 1 day in advance by MasterCard and Visa. This is also applicable for every transaction throughout the day at the same rate.
In order to avoid being surprised by the exchange rate in the future, it is highly advisable that you stay equipped with all the necessary knowledge of the charges that will be associated with your credit card transactions. The Foreign Currency Conversion data can be found on MasterCard and Visa websites. These rates keep changing and you should definitely check them before you travel.
Cash Advance Fee data and Foreign Transaction Charges data can be availed from the banks. Before you pack your bags, you can call your bank’s customer care service and find out more about these charges. These charges may fluctuate at regular intervals as they are dynamic in nature.
In case you are a frequent flyer, you must inquire about all the charges associated with foreign transactions and cash withdrawals before you apply for a credit card. You might find that there is a difference of 1% to 2% in the credit card offers provided by various banks. Choose the one that costs you the least. A great deal cannot be done about currency conversion fees as they are determined by Visa or MasterCard.
You must also read the offer document carefully before you take a decision. The offer document should not be underestimated or overlooked. There are several facts in that set of documents that might surprise you. All the details of the charges are present on the offer document. Since the rates are dynamic and they change from time to time, you might not find the exact figures. However, you will find everything about the regulations that govern these charges.