Using Credit Cards Abroad

One of the more annoying of the world's bank charges is the fee that banks charge you when you make a purchase on your credit card overseas. In fact, there are often three fees:

• The 1% fee which Visa and Mastercard charge the issuing bank, and which is usually passed on to the cardholder;
• An extra fee of up to 2% charged by the issuing bank for no obvious reason; and
• The hidden fees which may or may not be found lurking inside the exchange rate conversion.

Bankrate.com has a good overview of how the first two fees differ from issuer to issuer: Bank of America and Citibank charge a total of 3% after conversion to US dollars, for instance, while Wachovia and WaMu charge 1%, and Capital One actually eats the charge from Visa and Mastercard and charges 0%. As for the stand-alone cards, American Express charges 2% while Discover charges 0%.

Not a single bank would tell Bankrate why they might charge more than 1%, maybe because they were embarrassed to admit it was just a scheme for making money without any effort.

But I'd be very interested to see not how the fees compare in theory, but how they compare in practice. If you bought four identically-priced items overseas at exactly the same time, using a Visa card, a Mastercard, an Amex card and a Discover card, how would your charges differ? Discover, with its 0% fee, might look like the best option – but if it whacks you on the exchange rate, you might be better off elsewhere.

There are two reasons I'm a little bit suspicious of Discover's 0% fee, and they both come down to the fact that the Discover card is basically a US card, not a global one. As a result, relatively few overseas locations accept it in the first place, which means that currency conversion is less easy and common for Discover than it is for other cards. More importantly, there's no netting out: while lots of Americans use their Discover cards abroad, there aren't any Europeans, say, using their Discover cards in the US. So every time a Discover cardholder makes a purchase, Discover really does need to convert dollars into that foreign currency.

Visa, Mastercard, and Amex, on the other hand, have revenues in lots of different currencies on a daily basis. If American cardholders spend $1 million in Europe on the same day that European cardholders spend $1 million in America, everything can pretty much cancel itself out, and no actual FX trade needs to be done.

Still, this is all very theoretical. Does anybody know how and whether FX conversion rates differ in practice?