No foreign transaction fee credit cards in the UK

If you plan to buy something in a foreign currency, be it on holiday or shopping online, it's better to have a credit card that does not charge extra for foreign transaction fees.

Most debit and credit cards come with foreign transaction fees averaging around 2%-3% of the cost of the goods or service you paid for.

Read our guide to find out how you can get a credit card with no foreign transaction fee.

What is a foreign transaction fee?

A foreign transaction fee isn't always just the one fee. Usually it's a combination of two charges; from your credit card network and your credit card issuer.

Your credit card network (such as Visa or MasterCard) will add a charge for handling the transaction between the merchant and your credit card issuer (such as MBNA, NatWest, etc).

The second charge, if applicable, will come from the credit card issuer, which adds up to a total fee of 2%-3% of the bill.

The foreign transaction fee does not only apply to purchases made in another country, but also to spending online in a foreign currency.

If you are shopping online and see that the items in your basket are listed in a foreign currency, then it's highly likely that foreign transaction fees will be applicable.

When on holiday, the fees can add up quickly if you are regularly spending on a credit card, so it's worth shopping around for a no foreign transaction fee credit card.

No foreign transaction fee credit cards

Some credit cards have no foreign transaction fees, which means that the 2%-3% charge that is usually applicable on most debit and credit cards is waived.

This means that using a credit card with no foreign transaction fees can be one of the cheapest ways of spending money in a foreign currency.

Instead of being charged for every transaction on your credit card spent abroad or in a foreign currency, your payment will be converted to the local currency based on your credit card network’s exchange rate at the time of purchase.

This means that Visa or MasterCard's exchange rates will be applied to convert your spending into the local currency, with no additional costs.

Many of the credit cards on the market that offer no foreign transaction fees do not come with any extra features other than this, so it's worth deciding whether or not you will use this card when you're not on holiday too.

If not, then just make sure you pay off your balance after you come back from your holiday and let the card sit in your wallet until the next time you spend in a foreign currency.

Although you save money by not paying any foreign transaction fees, you are still having your money exchanged by a third party, which is why this exchange rate is not exactly perfect.

What is a 'perfect' exchange rate?

The 'perfect' exchange rate is the actual exchange rate banks use when transacting between themselves. This is never passed on to consumers, which is why you will see different exchange rates available from different suppliers. 

All currency exchangers (foreign exchange or FX traders) buy currency off you at one rate and sell it back to you at another. If you exchange £100 into euros (buy euros) and then exchange those back to GBP (sell euros) you will have lost money because the buy and sell price will be different. 

This gap is called the spread. Some also add commission, but commission-free FX has become more common. The money is made on the spread.

The more volatile the currency, the wider the spread. So if you are travelling to a country with a currency that has been stable against stirling, you’ll be getting the best deal.

Credit card networks such as Visa and MasterCard that exchange your credit card spend into the local currency, will use their own exchange rates, not necessarily the 'actual' exchange rate their underlying banks are using. They will also use the exchange rate when the transaction is processed, which may have changed since you actually made the purchase.

It could be cheaper to buy a fluctuating currency in cash if you think it has reached its lowest point, but this requires making an educated guess and comes with a risk that you won't have gained any value on your pounds.

Ultimately, the 'perfect' exchange rate you get with a credit card with no foreign transaction fees is most likely to give you the closest possible conversion to the currency in which you are making purchases.

Credit card cash withdrawals abroad

A no foreign transaction fees credit card will only be referring to credit card purchases.

Credit card cash withdrawals will still be charged at the credit card's usual interest rate from the moment you take your money out and every day until you pay off the withdrawn amount in full.

Most credit cards will also charge a fee for withdrawing cash of around 3% of the amount with a £3 minimum fee. Some credit cards with no foreign transaction fees will waive this fee, but you will still be charged the daily interest.

Generally, it is best to avoid withdrawing cash with a credit card. If you are in need of cash, then a debit card cash withdrawal will almost always work out cheaper.

Debit card withdrawals will usually only charge a fee of around 1%-3% for withdrawing the money, but there's no interest charged as the money is from your account.

Dynamic Currency Conversion

Another potentially costly fee to avoid is the Dynamic Currency Conversion fee that could potentially be added to credit card transactions.

This is added on by the merchant you're purchasing from, and they will usually ask you if you'd like to convert the cost of your payment into your currency instead of their currency.

The idea behind this feature is that it can help you understand how much you're actually paying instead of having to work it out using the exchange rate.

However, this feature comes at a cost to you as the exchange rate given will be decided by the merchant or their credit card payments processor. They will have a wide spread and so give you a poor rate.

This exchange rate is almost always worse than the exchange rate you would get from your credit card network. If in doubt, ask to pay in the local currency and always check that Dynamic Currency Conversion has not already been done for you without your consent.

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