Do credit cards charge higher exchange rates?

Do Credit Cards Charge Higher Exchange Rates?

When making purchases abroad, it’s crucial to be aware of the exchange rates charged by your credit card company. Understanding these rates can help you budget effectively and avoid unnecessary expenses.

The Interbank Rate: A Global Benchmark

Credit card companies base their exchange rates on the interbank rate, which is the benchmark for currency trading between banks. This rate is constantly fluctuating based on supply and demand in the global currency market.

The Conversion Fee: A Small Markup

While the interbank rate is generally favorable, most credit card companies add a small markup, typically around 1%, to each transaction. This markup is known as the conversion fee and represents the fee charged by the card issuer for converting your currency.

The Impact on Your Purchases

The conversion fee, although relatively small, can subtly increase the final cost of purchases made abroad. For example, if you purchase a product worth $100 in a foreign currency, the conversion fee could add an extra $1 to your total cost.

Factors to Consider

When selecting a credit card for international use, consider the following factors:

• Conversion fee: Choose a card with a low or no conversion fee to minimize additional costs.
• Foreign transaction fees: Some credit cards charge additional fees for foreign transactions. Check the terms and conditions of your card to avoid unexpected charges.
• Travel rewards: Some credit cards offer travel rewards, such as points or miles, which can offset the cost of conversion fees.

Conclusion

Credit cards generally offer favorable exchange rates based on the interbank rate. However, a small conversion fee is usually added to each transaction. By understanding the exchange rates charged by your credit card company and considering additional factors, you can make informed decisions when making purchases abroad.