Confusion over credit cards and exchange rates

irisheileen · Member

Confusion over credit cards and exchange rates

Itallian Chauffeur · Moderator

What's confusing you is a nasty piece of Economic tomfoolery called, 'Dynamic Currency Conversion'. It is also known by its initials -- DCC.

You can GOOGLE 'DCC' and learn all the intricacies, but ..

Here's MY admittedly Unscientific, layman's take:

Currencies are exchanged at a rate that fluctuates according to their relative "value". According to Yahoo Finance (as I type this) the CURRENT 'value' of 1 Euro is $1.3512. That rate changes, day by day, week by week -- although it usually only fluctuates incrementally. Since 2001, I've seen a Euro 'valued' as little as 80 Cents, US and as high as $1.45. It's been hovering within 2-3 cents of $1.35 for SOME time, now.

That is the Market Rate, however. Typically, banks charge a 'Handling Fee' for the conversion -- typically, that is 1-2% above Market, for Credit Transactions and 4%, for Cash. There may also be a Service Charge, which is typically a fixed fee. So, if you walk into a bank to exchange dollars into euros and the Market Rate is $1.35, they will sell you 100 Euros at approximately $140 ($1.395 each -- which is 3-4% above Market), plus a flat fee of $10 or so, depending on the amount.

If you charge 100 Euro on a Credit Card, they will charge you between $136 and $138 (1.35 each, plus 1-2% ). Visa and MasterCard charge 1%. AMEX charges 2%, but doesn't add any "extra' fees.

Additionally, the Card Issuer (Bank of America, Chase, Citi, etc) USUALLY -- but, NOT always -- charge a 'Foreign Transaction Fee' that can vary, from as little as 1% to as much as 5% -- Even though they actually have NOTHING to do with the transaction! In MOST cases, the Foreign Transaction Fee' applies -- EVEN IF THE TRANSACTION IS DONE IN DOLLARS! They argue that if the charge occurs in a Foreign Country, it is a 'Foreign Transaction'.

With DCC, the Merchant's Processor SETS the Exchange Rate (usually at the +4% rate) and charges you in US dollars. If your CC issuer charges a 'Foreign Transaction Fee', it STILL applies -- and the extra % is based upon the Higher exchange rate -- so, it is in effect, a DOUBLE penalty.

Many of the clerks who perform DCC don't even realize it; they are just processing the sale the way they were taught to. EU law requires that you be OFFERED the choice, but RARELY does that happen. If your receipt has a US dollar amount on it, you are probably being 'hit' with DCC. I've had MANY clerks tell me that it is only on the receipt for 'Information'. However, LOOK for a statement directly above the signature line on the credit slip -- If it says "I was offered the option to charge in my home currency" or something along those lines, then you are agreeing to DCC, by signing.

Obviously, the impact is negligible on a 10, 20 or even a 30 Euro charge -- but it can add a few dollars to every charge in the 1-200 Euro range.

Check your Credit Card disclosure document. Do they charge a 'Foreign Transaction Fee' -- If so, What percentage and under WHAT circumstances? I have a Visa that does NOT and a MasterCard that charges 4% -- BUT, it offers CC Insurance for Car Hire in Ireland. I use the MasterCard for my rental in Ireland and my Visa, for EVERTHING else.

Hope this helps!

Michele Erdvig · Host

That is from Irish Fireside. This is what I wrote in the comments there:

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“The good news is that the amount you see on the credit card slip is exactly what will appear on your credit card statement and your credit card company won’t charge you a foreign transaction fee.”
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Not always. Some USA based credit cards add a “foreign transaction fee” even if you do charge in dollars while in Ireland. Lately I have noticed that the Dynamic Currency Conversion rate is around 3 % – 5%. On my last trip 5%. Granted, on a 200 euro hotel bill that is only 10 euro. But I would rather spend the 10 on lunch or a couple of pints rather than give it away to a money-making scheme.
Plus, if you accept DCC on your whole trip it could cost you a whole lot more. Those on a budget who don’t have money to burn should look into the rules attached to their credit card transactions in advance.

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This is what it boils down to:

1. Find out from your credit card company whether they charge a foreign transaction fee and what percentage it is. Ask them if you charge in dollars in another country if they still charge the fee.

2. Dynamic Currency Conversion: If you let your card be charged in dollars (if you are from the US) while in Ireland you will pay extra and get a crummy exchange rate. Period.

3. Some credit cards do not charge a foreign transaction fee. My Capital One MasterCard does not and they use a good formula for the exchange rate they do use. If you have time, it will save you money to get a card that does not apply that fee.

yesiree · Guru

This is always a confusing topic. Especially because Dynamic Currency Conversion/Exchange isn't always a bad thing. It really depends on 1) the rate your credit card company may charge you in foreign transaction fees OR 2) the rate the credit card processor in Ireland will charge you - this % should be clearly marked on the credit card slip. If you know both those numbers, you can make an informed decision at the register.

Yesterday, I was in a shop where the credit card terminal automatically charged me in dollars rather than euros. The Dynamic Currency Conversion rate was 3.5%, which would have been better than the 5+% foreign transaction fee charged by my Chase card (fortunately, my Capital One card doesn't have a foreign transaction charge, so I use that whenever possible). The clerk was well-informed on using the device and able to push a few buttons to print a new slip in euros.

I noticed in the last year that some terminals are automatically printing a "QUOTE" when the card is swiped (it says "QUOTE" on the slip). It's nice because it encourages choice, but it's bad because it can be even more confusing... especially in shops where foreign cards are rare and clerks have never seen slips print in a currency other than euros (YOU may know more about the topic than them).

It's good that you're asking your questions now rather than trying to figure it out when you're on the road

Michele Erdvig · Host

Corey, I totally agree that we usually know more about DCC than the clerks running the credit cards. I can't tell you how many times I have had to "educate" clerks. They still look confused afterward. Since they don't have to deal with the problem on their personal credit card it is tough for them to wrap their minds around it.

So if you don't want DCC in Ireland tell the clerk before handing them your card. It gets longer and more involved if they have to issue a credit and start over. And if they do issue a credit be sure to keep all slips and paperwork in case you get charged twice!

MOSTLY NOT TRUE: