The Foreign Conversion Scam

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I am always complaining about credit card foreign exchange fees. I love earning rewards, and I love traveling overseas. The last thing I want to do is to give up mindless foreign conversion fees that are greater than my rewards, every time I use my credit card in another country.

I have my Capitol One card that I use exclusively outside the US in order to avoid those fees, yet there is another, even worse scam out there. “Dynamic Currency Conversion” is a repulsive scam that is perpetrated by merchants who accept credit cards in order to rip off travelers.

“Dynamic Currency Conversion”: a Complicated Phrase That Means Scam

The idea is that the merchant, not the credit card company, will perform the conversion and charge your credit card in dollars. Guess what, their conversion rate is terrible and the merchant gets a cut from the conversion company. If you don’t believe me, read it right from the website of First Data, one of the companies offering this “service”. Here is what they claim to be a benefit to the merchant:

Supplies you with an ongoing revenue stream year after year, which increases as international foreign cardholder volume increases.

The companies also attempt to justify this scam by claiming that customers get to see the amount they are being charged in their home currency. For example, First Data claims this is a benefit to customers in that it:

* Allows foreign customers to pay for their goods or services in their local currency while giving them total visibility of their card transaction as it will appear on their credit card statement
* No hidden fees or charges
* Up-to-date rates of exchange based on wholesale Reuter’s rate are fully disclosed
* Dual currencies printed on their credit card receipt
* Consumers can make an educated and informed decision

So it is a benefit in that it charges you more, but explains it clearly. Wikipedia has a more detailed description here.

It turns out that the exchange rate offered by credit card companies is actually a very competitive rate. The problem is that most of them also charge a fee. American Express, for example, just raised their foreign exchange fee from 2% to 2.7% this year. That is why I will not use my Amex outside the United States. The “Dynamic Currency Exchange” racket is predicated on substituting that fee for a much worse exchange rate, essentially doubling the fee. Actually, it is worse, as some credit card issuers will tack their fee on to any foreign transaction, whether in dollars or any other currency! Because they spell it out for you ahead of time, the “currency converters” claim it to be a “benefit”.

How Is This Legal?

Legally, the merchants are supposed to ask you for permission before they perform their own conversion. The check in staff at your hotel or your waiter at a restaurant is supposed to say something like “Would you prefer it if we charged your credit card in your home currency?”. After that, you are supposed to be able to decline this “service”. In reality, there are many reports that this doesn’t always happen. Good luck if you are in a country where you don’t speak the local language, and your waiter attempts to explain this “option” to you in Bulgarian after he runs your card.

By far the best explanation of this practice that I have seen comes from this article in the Washington Post from 2005. While some of the details are out of date, the concept is still accurate.

My Advice To You

The whole idea of reward cards is that you get something back from each charge. Dynamic Currency Conversion and Foreign Exchange fees turn your cards from reward cards into penalty cards every time you step out of the country.

When traveling to foreign countries:

  • Use a credit card like Capitol One or Schwab that has no foreign transaction fees.
  • Decline all offers from merchants to convert your charge to your home currency.
  • Save your receipts, especially on big ticket purchases like hotels and rental cars. Request a chargeback on any purchase where a merchant uses this scam without your consent.

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2 Responses to “The Foreign Conversion Scam”

  1. Ed Venter Says:

    A similar conversion scam by Dollar Rental Car (Cancun, MX) is to quote you in U.S. dollars on thier U.S. website. At the point of rental in Cancun, the paperwork then converts the US Dollars to Pesos at a 15:1 conversion. At the end of the rental you pay the 40% inflated pesos conversion rate which is charged on your credit card in Pesos, and then your card company converts the new higher Pesos rate back to US dollars at 10.50 Pesos to dollar requiring 40% more dollars to pay the indicated Pesos on your bill. Wammo… 40% hidden surcharge in a conversion shell game.

  2. Richard Haylock Says:

    The problem is that they don’t ask and even if you spot it they don’t seem to be able to charge in the local currency. Visa have stated in an email sent to me that they have strict rules but they tell you to go to your own bank and complain. My bank in the UK replies “what are we meant to do?” I can understand their point, Visa makes the rules but seems to do nothing to enforce them. My experience in Spain is that all Spanish owned companies operate this scam but if the company is French or German owned they do not ie. Aki, Al Campo and Lidels.

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