Watch conversion rate on credit-card purchases

When Eileen O’Donnell saw that a shop in Ireland was processing her credit-card purchase in dollars instead of euros, she protested, fearing that the exchange rate might not be calculated in her favor.

“The person said, ‘This is how we do it,’ ” O’Donnell recalls. “I felt I had no choice.”

Her suspicions were confirmed when she arrived back home in Seattle and checked the daily exchange rates in effect on the dates she traveled.

That bill reflected several charges, including a car rental, converted at a rate that was 4 to 5 cents on the dollar below the official exchange rate – the base rate banks use to convert foreign currency transactions into dollars.

The difference amounted to about $20 on $500 worth of charges.

“I was shocked to figure out how much more I was paying,” O’Donnell says.

Her charges were processed under a system called “dynamic currency conversion” that lets merchants in foreign countries offer customers the option of paying in dollars instead of the local currency – the theory being that you won’t have to wait until your monthly statement comes to find out how much things cost.

Some business travelers might find this handy for submitting their expenses on foreign trips, but for the average tourist, the costs can outweigh the convenience.

This is because the retailers set the exchange rates themselves, usually several cents on the dollar lower than you’d get by either paying cash or having your credit-card purchase put through in the local currency.

“I can think of no reason to ever accept a bill in dollars out of the country,” says Joe Brancatelli, author of www.joesentme.com, an online newsletter for business travelers.

He advises his readers to “just say no” to dynamic currency conversions.

“Car rentals are the most obvious examples, but it’s beginning to happen elsewhere – restaurants, hotels, wherever they can mark you as a visitor,” Brancatelli says. “And there is only one reason for it. The retailer gets to share in the profit on the currency exchange.”

With the dollar dropping in value and exchange rates fluctuating on a daily basis, “some customers may feel this is valuable information to them, to know that they will get charged $50 instead of 25 pounds,” says Simon Barker, director of global corporate relations for Visa International.

However, he adds, consumers should “know that they are being charged extra and they should know they have the option to decline.”

But as it is with some other types of business services that people must “opt out of” to avoid, it’s not always that simple.

O’Donnell, who visited Ireland in October 2003, says she wasn’t always given the option, or if she was, the choice wasn’t immediately apparent.

Rereading the invoice on her Budget Rent A Car agreement when she got home, she saw a sentence at the bottom that said: “I acknowledge I had a choice to pay in euros.”

“I certainly didn’t notice that statement,” she says. “Nor probably would I have understood what it meant.”

The newest wrinkle is Visa and MasterCard’s recent decision to apply a conversion fee to all foreign transactions – whether they’re processed by the merchant in the local currency or in dollars.

Visa began charging its member banks a 1 percentage point fee on April 1. MasterCard will add a 0.8 point surcharge as of Oct. 1.

Assuming banks pass on those fees as they usually do, Brancatelli says, this amounts to the customer being “double dipped” – once by the merchant and again by the credit card companies who apply the fee to the total amount charged.

Visa and MasterCard always have charged a 1 point conversion fee on overseas charges processed in foreign currencies. What’s new are plans to apply a fee to dollar-denominated foreign transactions as well.

Some banks and other companies that issue credit cards add their own fees on foreign transactions, typically another 2 points. Most are in the process of deciding how they might apply these fees to the dollar-denominated conversions in light of Visa and MasterCard’s recent moves.

Keeping track of how all this adds up is difficult for the average consumer who may not even be aware that the fees exist.

Some banks are beginning to break out the fees separately on monthly bills. In the past, the rule of thumb has been to process them in the form of a diluted exchange rate reflected in the total dollar amount of the purchase.

A 1,000-euro hotel bill, for instance, would show up on our statement as $1,310 if the official or wholesale exchange rate on the day you charged the amount was $1.30 and the charge was processed with a 1 point fee ($1,300 plus $10). If you were charged 3 points, the total amount would jump to $1,330, or $1,350 at 5 points.

Credit-card companies have been allowing merchants to process overseas charges in dollars for a few years, but few have done so. The business accounts for about 2 percent of Visa’s international transactions.

That may be changing as retailers look for new sources of revenue in a down economy and travelers become frustrated with using fluctuating exchange rates to figure out the bottom-line cost of their trips.

“It’s something that’s going to grow just because merchants obviously have incentives to do it,” says Visa’s Barker.

Hertz, for instance, began offering the option in 2003 for cars rented with a Visa or MasterCard in the United Kingdom, and recently notified customers it was adding eight other countries including the Netherlands, Belgium, Luxembourg, France, Spain, Germany, Italy and Switzerland.

Hertz calculates the total charge using exchange rates set by the Royal Bank of Scotland and adds a 2.5 point fee.

Information on daily wholesale exchange rates plus tools for figuring the rate based on various percentage markups is at www.visa.com/exchangerates and www.oanda.com.

The best advice is to use a no-annual-fee card that carries the lowest foreign currency conversion surcharge.

Cards issued by Bank of America, US Bank and Wells Fargo carry 3 point fees.

Those that carry 1 point fees are issued by Boeing, Watermark and other state-chartered credit unions in Seattle (membership is open to anyone who works or lives in Washington); some commercial banks, such as Capital One (www.capitalone.com), and many smaller ones; and organizations such as the American Automobile Association.

Cash withdrawals from automated teller machines that debit your checking or savings account are processed in much the same way.

The best way to do this is to obtain a cash card (separate from a credit card) from a financial institution that figures the exchange rate using the minimum 1 point processing fee and has no additional withdrawal fee.