Reader Request: Why You Should Always Pay for Foreign Purchases in the Local Currency & Not in US Dollars

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Million Mile Secrets reader Jonathan writes in:

One thing I can’t figure out – is it better to pay for things in local currency and let Visa/ MasterCard convert back to US [currency]?  All the places I go to buy something offer to convert to dollars.   I don’t pay a foreign transaction fee on my card. 

When Emily and I were in Paris, we were often asked if we wanted to pay our bill via credit card in euros or in US dollars.  For example, if we were at a cafe and spent 30 euros, we’d get the option of seeing the bill of 30 euros converted to US dollars.

We always paid our bill in euros because if we paid our bill in US dollars, we’d be charged a separate currency conversion fee, despite using the Chase British Airways card which had no foreign transaction fee!

We noticed that almost all of the shops and cafes were very eager to bill us in US dollars instead of in the local currency (euros).

The reason for that, I suspect, is the extra profit margin (3% upwards) for the merchant when you pay in your home currency (US dollars in our case) instead of in the local currency.

This 3%+ markup to see the foreign currency converted to your home currency is in addition to the ~3% foreign transaction fee if you have a US-issued credit card which charges a foreign transaction fee.

Dynamic Currency Conversion

Welcome to dynamic currency conversion where you pay extra for the convenience of seeing the local currency converted to your home currency!

The way it works is that Visa and MasterCard (but not American Express) allows their merchants to give foreign customers a choice of transaction currencies when they make a purchase.  Those choices are typically the local currency and the home currency.

If you choose anything other than local currency, you pay a premium in addition to the exchange rate included by Visa and MasterCard and the foreign transaction fee charged by the bank which issued your credit card.

Seeing a foreign transaction in your home currency is a benefit for many travelers who don’t like to do the math while shopping, but it will cost you 3% or more for the convenience.

My personal view is that dynamic currency conversion is a sneaky way to squeeze extra money out of a consumer especially when overseas merchants refuse to process a transaction in local currency.

Sure consumers like the convenience of seeing their foreign charges in the local currency, but I suspect that many wouldn’t know that they are paying extra for that convenience.

If the overseas merchant refuses to charge you in the local currency (which is against Visa and MasterCard rules), you can include a comment in the signature line that you do not agree to the charge because it is not in the local currency and dispute the transaction when you come home.

Bottom Line:  Always choose to view your purchases outside the US in the local currency when paying with a credit or debit card because you’ll pay 3% or higher for the convenience of viewing your bill in your home currency.