Should You Pay in Euros or Dollars on a Credit Card?
Understand the optimal currency choice for international credit card payments to save on exchange rates and fees.
When using a credit card for international purchases, travelers often encounter a choice: pay in the local currency or in U.S. Dollars. This decision can significantly impact the total cost of a transaction. Understanding the mechanisms and associated fees is essential for making an informed choice that can lead to financial savings while abroad.
Understanding Dynamic Currency Conversion
Dynamic Currency Conversion (DCC) is a service offered by merchants that allows a foreign cardholder to complete a transaction in their home currency. When presented with the option to pay in Euros or Dollars at the point of sale, selecting U.S. Dollars means opting for DCC.
The merchant determines the exchange rate for this conversion. This rate typically includes a markup. While DCC provides immediate transparency by showing the exact cost in your familiar home currency, this convenience often comes at a higher price due to less favorable exchange rates.
Credit Card Network Rates Versus Merchant Rates
A significant difference exists between the exchange rates offered by credit card networks and those provided through Dynamic Currency Conversion. Major credit card networks, such as Visa, Mastercard, American Express, and Discover, generally utilize wholesale or interbank exchange rates. These rates are competitive, often closely reflecting the official market rate, and are typically updated daily.
Conversely, when a merchant offers DCC, the exchange rate they apply usually includes a substantial markup. This markup is a combination of a currency conversion fee and a profit margin for the merchant. This added percentage can range from 3% to 7% or even higher. Consequently, choosing to pay in U.S. Dollars via DCC means accepting a less favorable exchange rate compared to the rate your credit card network would provide.
Foreign Transaction Fees
Separate from the exchange rate markup associated with Dynamic Currency Conversion are foreign transaction fees. These are charges levied by your bank for processing transactions made outside of your home country. These fees typically apply regardless of whether the transaction was processed in the local currency or converted to U.S. Dollars via DCC, unless your specific credit card waives them.
Foreign transaction fees are generally calculated as a percentage of the transaction amount, commonly ranging from 1% to 3%. For instance, bank-issued credit cards often charge an average of 2.97% per foreign transaction. These fees are distinct from the exchange rate applied by either the credit card network or a DCC provider, representing an additional cost component that impacts the overall expense of international spending.
Making the Best Choice
When presented with the option to pay in Euros or U.S. Dollars while using a credit card abroad, it is almost always more advantageous to choose the local currency, Euros. This decision allows your credit card network to handle the currency conversion, which typically occurs at a more favorable, wholesale exchange rate. Declining Dynamic Currency Conversion helps avoid inflated exchange rates set by merchants.
Before traveling, review your credit card’s foreign transaction fee policy. Some credit cards offer no foreign transaction fees, which can lead to additional savings on international purchases. By consistently opting to pay in the local currency and using a card with no foreign transaction fees, you can minimize the costs associated with international credit card usage.