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If you’ve used your credit card outside of the U.S. — or simply made a purchase online through a merchant that wasn’t U.S.-based — you may have noticed an extra cost added to your purchase. Called a foreign transaction fee, these charges can add up quickly.

Luckily, it is possible to steer clear of credit card fees for international transactions. Let’s take a closer look at what a foreign transaction fee on a credit card is, how much they typically run, and how you can avoid them.

What Is a Credit Card Foreign Transaction Fee?

A credit card foreign transaction fee is a surcharge, or an additional charge, that some credit cards add to transactions that are processed outside of the U.S. Put another way, it’s a cost that applies for credit card processing when certain conditions are met.

Credit card foreign transaction fees may apply when you make an online purchase from a merchant that’s located outside of the U.S. Additionally, they may apply when you’re using a credit card in another country.

While broadly referred to as a foreign transaction fee, this fee is actually composed of two different charges. One part comes from the credit card issuers and the other is from the credit card network (think Visa or Mastercard, for example).

Recommended: What is a Charge Card?

How Are Credit Card Foreign Transaction Fees Calculated?

To find out how international credit card fees are calculated for your particular credit card, check your card’s terms and conditions. You’ll likely find information on foreign transaction fees in a section titled “Rates and Fees” or “Pricing and Terms.”

In general, however, the amount of your credit card’s international fees is calculated based on a set percentage of the transaction amount.

For example, say your credit card charges a 3% foreign transaction fee, and you’re paying about $50 for souvenirs you bought at a merchant abroad. In this instance, the credit card network may take 1.5% of the transaction, while the credit card issuer would deduct 1.5%. That would result in a total foreign transaction fee of $1.50 for that particular purchase.

Recommended: How to Avoid Interest on a Credit Card

How Much Do Credit Card Foreign Transaction Fees Cost?

Some cards don’t come with credit card international fees, meaning you don’t have to worry about this credit card cost. For cards that do charge foreign transaction fees, this fee can range from 1% to 3% per transaction, with 3% being the average rate.

When this credit card fee for international transactions is charged once, it may not seem like a big deal. But if you make a lot of overseas purchases, it can really add up. If you have a 3% foreign fee credit card, for example, that will tack on $3 for every $100 you put on the card.

Recommended: Tips for Using a Credit Card Responsibly

Foreign Transaction Fees vs Currency Conversion Fees

A foreign transaction fee isn’t the same thing as a currency conversion fee. Rather, a currency conversion fee is generally one portion of the overall foreign transaction fee you may be charged.

A currency conversion fee is the cost charged by the credit card network to cover the cost of converting funds into the currency of the merchant. So, if you were making a purchase in Spain, the currency would get converted from U.S. dollars to the euro.

Visa and Mastercard charge a 1% currency conversion fee to card issuers. It’s up to the card issuer whether to pass along that fee to the cardholder as part of the overall foreign transaction fee charged — an example of how credit card companies make money.

Spotting Credit Card Foreign Transaction Fees

Aside from looking at the terms and conditions you were provided when you received your credit card, you can look at your card issuer’s website to learn more about any foreign transaction fees. Information is typically listed in the “fees” section. You also could use the search function on that webpage to find any mentions of foreign transaction fees.

Another option is to look at your credit card statement, as issuers must list fees separately on your monthly bill. By reviewing this section of your statement, you’ll see what you’re actually being charged for purchases you’ve made that trigger this fee. Besides, routinely reviewing your credit card statement is a good credit card rule to follow anyways, as it can help you track your spending and notice any potentially fraudulent activity.

When Are Credit Card Foreign Transaction Fees Charged?

Just like every credit card doesn’t charge a credit card annual fee, not all credit cards charge a foreign transaction fee. If yours does, then the credit card issuer will charge them when you’re using your card for purchases made outside of the U.S. This can include when you’re traveling in a foreign country and buying goods and services, or if you shop online with a merchant located abroad.

Tips for Avoiding Credit Card Foreign Transaction Fees

Hoping to steer clear of a foreign fee on credit cards? Here are some ways you may be able to do so.

Find a Card With No Foreign Transaction Fees

The most straightforward way to avoid foreign transaction fees is to simply choose a credit card that doesn’t charge them. Some travel reward cards, for example, list zero foreign transaction fees as a benefit for card holders.

This isn’t limited to travel reward cards, however, and it doesn’t apply to all of them. In other words, you’ll want to make sure to shop around before committing to a card.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

Consider an International Credit Card

If you’re a frequent traveler or have a big trip coming up, you may decide to get an international credit card. This will allow you to make purchases and use ATMs in many (but not all) countries around the world. An international credit card also can be helpful if you don’t want to convert U.S. dollars to that country’s currency or use traveler’s checks for your expenditures.

However, some international credit cards do have foreign transaction fees, so check carefully before signing up for one.

Exchange Your Money Before Traveling

You can also avoid foreign transaction fees by exchanging U.S. currency into the native currency for the place(s) you plan to travel. Then, you can simply pay cash for purchases.

Most major banks in the United States will exchange U.S. dollars for the appropriate foreign currency before you travel. They may not have less commonly used currencies available though, so double check before you head to the bank.

You may be able to directly exchange cash at a local bank, or you may need to place an order with a bank online or over the phone. Exchanges may occur the same day, or they may take a couple of days to complete.

If you run out of time, airports will likely have currency exchange services available, either in-person or through a kiosk. Although convenient, the exchange rates are usually less favorable to you than what your bank can offer.

Also keep in mind that carrying cash while traveling can involve risk of loss or theft.

Open a Bank Account With No Foreign Transaction Fees

Another possibility is to open a bank account that allows you to use ATMs without foreign transaction fees or out-of-network fees. Or, you might check to see if your local bank already offers this feature. Some banks have partnerships with financial institutions abroad that can allow you to withdraw funds without paying fees, while others simply reimburse any incurred costs.

Before taking out too much cash, however, keep in mind the potential safety risks of carrying around a large amount of money.

Recommended: When Are Credit Card Payments Due

The Takeaway

Once you know what a foreign transaction fee on a credit card is, you can figure out how to avoid them. At its simplest, a foreign transaction fee is an expense charged by many credit card companies when transactions are made with a merchant outside of the U.S. Not all credit cards charge this fee, so it can make sense to shop around for one that doesn’t if you know you’ll be making these kinds of purchases.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Are credit card foreign transaction fees tax-deductible?

In general, businesses (but not individuals) can deduct credit card fees as long as the business can demonstrate that the card was used for business expenses. Check with your accountant for any specific questions.

Do foreign transaction fees apply to online purchases?

Yes, they may. If you’re using a credit card that charges foreign transaction fees, then those fees will apply to online purchases if the merchant is not located in the United States.

Do all credit cards have foreign transaction fees?

No, they don’t. A number of travel cards don’t charge foreign transaction fees, though they’re not necessarily the only type of credit card that doesn’t levy this fee.

Are foreign transaction fees affected by exchange rates?

Typically, foreign transaction fees are based on a predetermined percentage of each transaction. That percentage doesn’t fluctuate when the exchange rate changes.

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Photo credit: iStock/Vera Shestak

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Gap insurance is additional coverage drivers can purchase to pay off their auto loan after their primary coverage pays out for a totaled or stolen vehicle. Gap insurance is beneficial when a car’s depreciated value isn’t as high as the loan balance.

Gap coverage can be helpful and cost effective, but it isn’t always worth it. We’ll discuss how gap insurance works, pros and cons, and what it doesn’t cover.

What Is Gap Insurance?

Not everyone is familiar with gap insurance, since this car insurance term is only relevant to buyers of brand-new cars. It refers to coverage from an insurance agency or car dealership that will pay your outstanding loan or lease balance when your car is totaled or stolen and you owe more than the car’s value.

Your insurance policy or lender might describe gap insurance as loan/lease gap coverage. Gap coverage is accessible only to the original owner of a new car or the leaseholder of a new vehicle. Although it is not required, many car owners who conduct personal insurance planning believe it’s worth the minimal extra cost.

Recommended: How to Save on Car Maintenance Costs

Who Needs Gap Coverage

A new vehicle will depreciate 40% in five years on average. Some cars depreciate more than others, with luxury vehicles and SUVs taking the biggest hit. As a result, during your first five years of car ownership, your car’s value can plummet while your loan balance remains well above your vehicle’s worth.

How much car insurance you need is often based on your comfort level and financial situation. Gap insurance, however, is particularly advantageous if you make a minimal down payment, since your loan amount will be higher. A car loan can take five years or more to pay off. The timeframe of the loan increases the chances of losing the car to an accident or theft, leaving you with an insurance payout based on massive depreciation.

Leasing a car presents a similar problem. Your insurance will cover only the car’s depreciated value. In case of loss, gap insurance can cover any additional amount you owe on the lease. Some lenders may require that drivers purchase gap insurance to obtain financing.

How Does Gap Insurance Work?

How car insurance works isn’t always intuitive. Let’s say you buy a new car for $35,000. You pay $5,000 down and take out a loan for the remaining $30,000. A few years later your car is stolen, and you file an insurance claim. Your car is worth $20,000, but you still owe $25,000 on the car loan. After your policy’s $500 deductible, your insurance pays out $19,500.

At this point, you still owe your lender $5,500 for the auto loan. This is where gap insurance comes in. The policy pays your lender the remaining amount due, and the debt is gone.

How Gap Insurance Works After a Car Is Totaled

In another example, an accident totals your car. A vehicle is “totaled” when needed repairs cost more than the vehicle is worth. Your insurance company provides a payout for the car’s current value.

As in the case of theft, your insurance will send a payout minus the deductible (learn about the types of deductibles in insurance). But you’re still on the hook for the remainder of your car loan. Gap coverage relieves you of that responsibility, potentially saving you thousands.

Recommended: How Much Does Insurance Go Up After An Accident?

Pros and Cons of Gap Insurance

Gap insurance offers a number of benefits:

•   Coverage to satisfy your auto loan in full in the event of theft or totaling the vehicle.

•   Inexpensive pricing when purchased from most insurance companies.

•   Protects you if you can only afford a small down payment on a new vehicle.

•   Especially helpful with cars that rapidly depreciate.

However, gap insurance also has several drawbacks:

•   Unusable if you don’t total your vehicle or lose it to theft.

•   Increases your insurance premium.

•   Less helpful if you put down a significant amount on your purchase, shrinking your loan amount.

•   Doesn’t make as much sense if you rarely drive.

How to Choose the Right Gap Insurance

Most car dealerships sell gap insurance, but you’ll pay far less if your car insurance company adds gap coverage to your policy. Your gap insurance and comprehensive coverage usually will come from the same company. You can’t split the policies between two companies.

Before purchasing comprehensive coverage for a new vehicle, ask the insurance company if it provides gap insurance. Some companies, like Geico and Farmers, don’t offer it.

Gap coverage from an insurance company costs about $60 annually. At a car dealership, you can pay up to $600 for a similar policy. Although you can add that cost to your auto loan, you’ll increase the interest you’ll pay. Plus, you may not have the option to cancel your gap insurance later if you don’t need it.

The company you choose and the level of coverage you need will affect the price of your gap insurance.

When to Cancel Your Gap Coverage

Once you pay off your auto loan, there’s no reason to keep your gap coverage, as you won’t owe your lender anything if you total your car. However, if you’re still midway through paying off your loan, canceling gap coverage might still make sense.

For example, we’ll assume you have $5,000 remaining on your loan. You look up your car’s estimated value on Kelley Blue Book and discover that your car is worth about $4,500. It may make sense to drop your gap insurance and risk the minor $500 financial hit if the car is totaled or stolen.

Selling or exchanging your car is another reason to cancel your gap insurance. It’s wise to make sure your insurance covers your car until the day you sell it. Otherwise, an accident could cost you thousands.

If you do cancel your gap coverage, you may qualify for a partial refund. For instance, when you pay off your loan early and the gap coverage was included in the loan, you can possibly request a refund of any prepaid premiums.

What Gap Insurance Doesn’t Cover

Gap insurance can be a tremendous help in certain situations, but there are expenses that the policy won’t cover:

•   Your comprehensive policy deductible

•   Down payment for a vehicle

•   Extended warranties

•   Late payments and related fees on your auto loan or lease

•   Security deposits

•   Lease penalties

•   Carry-over amounts from prior loans or leases

•   Credit insurance charges for your auto loan

How to Save Money on Gap Insurance

​​Gap insurance policies are usually affordable when purchased from a traditional or online insurance company. But you can offset the extra cost by following these steps:

•   Shop around. Remember, your comprehensive, collision, and gap coverage usually come from the same company, but not all insurance companies offer gap coverage. Ask about gap coverage availability and pricing before picking a policy.

•   Look into discounts. You may be eligible for reduced rates if your projected mileage is low or you have a safe driving record. Learn more about how to lower your car insurance.

•   Sign up for voluntary tracking. Your insurance company may offer a lower rate if you allow them to install a tracking device in your car. You’ll have extra incentive to drive sensibly if you’re saving money.

•   Pay annually or biannually. Monthly payments for auto insurance often cost slightly more. If you can cover the annual bill up front, you’ll reduce the total amount paid.

Is It Worth Getting Gap Coverage?

Because gap coverage is typically inexpensive, it’s often worth purchasing for a new vehicle. For a few dollars a month, it can save you potentially thousands in the event of a bad accident or theft. Plus, if you’re new to the road, purchasing gap coverage is one of the crucial insurance tips for first time drivers.

However, the lower your loan balance, the less valuable gap coverage becomes. Over the years, the gap between your loan balance and car’s value can close, and gap coverage will be of little value.

The Takeaway

Anyone purchasing or leasing a brand-new car will likely find gap coverage worthwhile, especially if you paid a low down payment. New vehicles depreciate rapidly in the first few years of ownership, potentially leaving the owner with a loan balance that’s higher than the vehicle is worth after an accident or theft. Yet auto insurance pays out only the vehicle’s market value. With an average monthly cost of a few dollars, gap coverage can save drivers thousands. You can cancel gap coverage when you no longer need it.

When you’re ready to shop for auto insurance, SoFi can help. Our online auto insurance comparison tool lets you see quotes from a network of top insurance providers within minutes, saving you time and hassle.

SoFi brings you real rates, with no bait and switch.

FAQ

Does gap insurance give you money?

Gap insurance pays off your car loan after your main coverage pays you the actual value of your totaled or stolen vehicle. That’s important because depreciation can result in a loan balance that’s higher than the vehicle’s value.

Do you need car gap insurance if you have full coverage?

Full auto coverage will pay out your car’s actual market value. However, since your loan balance may be higher than your car’s value, especially in your first few years of ownership, gap insurance is extremely useful in addition to full coverage.

How long does it take to get a gap insurance refund?

After canceling gap coverage, your insurance company will send you a prorated refund in four to six weeks.

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Photo credit: iStock/ollo

Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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