What is a Foreign Transaction Fee on Credit Cards and How to avoid them?

Posted by  Fintra , updated 2025-03-11

As globalization continues to shape our daily lives, many Indians are exploring international travel and purchasing from foreign online stores. However, many individuals are often surprised by a charge they may not fully grasp: the foreign transaction fee associated with credit cards. Understanding this fee is essential for making informed financial decisions. This blog intends to explain what foreign transaction fees are, why they exist, and how Indian consumers can effectively manage these charges. 

The topics we will cover will be:

1. Understanding Foreign Transaction Fees
2. Why do Credit Card Issuers charge Foreign Transaction Fees?
3. When are Foreign Transaction Fees Applied?
4. How to calculate Foreign Transaction Fees?
5. How to avoid Foreign Transaction Fees?

Understanding Foreign Transaction Fees

A foreign transaction fee is a charge that credit card issuers impose for transactions made in a foreign currency or processed outside India. These fees usually range from 1% to 3% of the transaction amount. For example, if you make a purchase of Rs. 20,000 while travelling abroad and your credit card has a foreign transaction fee of 2%, you will face an additional charge of Rs. 400 on your statement.

These fees can be confusing, especially for those who might not anticipate extra costs when using their credit card abroad or for international purchases. Understanding how these fees work is essential for managing your finances effectively and avoiding unnecessary expenses. 

A few banks in India that usually have either zero foreign transaction fees and/or very low foreign transaction fees would be Citibank, RBL Bank, Axis Bank, SBI, and HDFC Bank.

Why do Credit Card Issuers charge Foreign Transaction Fees?

Credit card issuers charge foreign transaction fees primarily to cover the costs of processing international payments. When you use your card for purchases abroad, various intermediaries, including foreign banks and payment networks, are involved in completing the transaction. These intermediaries impose fees, which the Indian card issuer typically passes on to the consumer as foreign transaction fees. For example, when you make a foreign transaction, your credit card company first converts the amount from the foreign currency to your home currency. This conversion is handled by the payment processor before settling the transaction with your bank. As a result, a foreign transaction fee is applied. The total amount charged, including the foreign transaction fee, will appear on your credit card statement.

Additionally, converting Indian Rupees (INR) into foreign currencies can incur significant costs. Credit card issuers also take on the risk of exchange rate fluctuations, which is another reason for the existence of these fees.

When are Foreign Transaction Fees Applied?

Foreign transaction fees may occur in various situations as described below:

1. Purchases in Foreign Currencies: When you make a purchase in a currency other than Indian Rupees (INR), you may have to pay a foreign transaction fee. For instance, if you buy a pair of shoes that cost $100 (approximately Rs. 8,000) at a store in the U.S., your credit card will likely incur these fees.
2. Online Transactions with Foreign Merchants: When purchasing items on international e-commerce platforms or websites, these transactions may incur foreign transaction fees, although the final billing is done in INR. Such transactions include subscriptions to overseas services or online bookings for international vacations.
3. International ATM Withdrawals: Withdrawing cash from an ATM while travelling may incur foreign transaction fees. In addition to the ATM operator's withdrawal fee, your bank might charge a currency conversion fee.

How to calculate Foreign Transaction Fees?

To calculate the Foreign transaction fee, use the formula: Purchase amount in Rs. × foreign transaction fee percentage

For example:

1. Foreign purchase amount: USD 100
2. Exchange rate: 1 USD = Rs. 84
3. Converted amount in INR: $100 x Rs. 84 = Rs. 8,400
4. Foreign transaction fee percentage: 3%

Foreign transaction fee calculation: Rs. 8,400 x 0.03 = Rs. 252  

How to avoid Foreign Transaction Fees?

As an informed consumer, you can take several steps to minimize or avoid foreign transaction fees when using a credit card. Here are some effective strategies:

1. Use Credit Cards that don't charge Foreign Transaction Fees: Many financial institutions in India provide credit cards that do not charge foreign transaction fees. These cards are particularly advantageous for travellers and those who frequently shop internationally. Fintra can assist you in comparing various credit card offers based on their terms and benefits, helping you select a card that aligns with your spending habits.
2. Get a Multi-Currency Card: Numerous banks in India offer multi-currency cards that permit you to hold and spend in various currencies without incurring conversion fees. This option is especially beneficial for frequent travellers, because it enables them to pay in the local currency and avoid foreign transaction fees.
3. Choose to Pay in the Local Currency: When travelling abroad, if given the option to make a purchase in either Indian Rupees (INR) or the local currency, always choose to make the purchase in the local currency. This strategy helps to avoid dynamic currency conversion fees—charges added by merchants that convert your transaction from the local currency to INR at inflated rates.
4. Consider Using International Debit Cards: International debit cards generally have lower foreign transaction fees and can be a great alternative to credit cards for spending abroad. Some banks provide debit cards with competitive exchange rates and no foreign transaction fees.
5. Carefully Review The Credit Card Agreement: Be sure to thoroughly review your credit card terms and conditions to understand any associated foreign transaction fees. This will help you prepare and budget effectively before embarking on international trips.

Conclusion: The Importance of Financial Literacy: Leveraging Fintra

In today's digital age, it is vital to understand financial products and make informed decisions. Platforms like Fintra play an essential role in enabling Indian consumers to navigate the financial landscape. Fintra offers comparative insights on a wide range of financial products, including credit cards, personal loans, and investment options. Use Fintra to easily compare credit card offerings based on fees, rewards, and additional benefits tailored to your needs. By doing so, it will enable you to determine the best card for international transactions and avoid unnecessary costs.