Times have changed; electronic bank transactions have taken over the duties of the Foreign Exchange desk and your credit card may be out of tune.

Loking forward to a foreign holiday this year?  Kids traveling abroad with a school group?  In the old days -- not so long ago -- no sensible traveler would leave the country without a packet of travelers checks neatly stowed in their carry bag.  No more. New strategies are required for both credit card purchases and cash needs while traveling outside the country.

Credit Cards Charges In Foreign Countries

Most of us have long settled into a credit card routine with the Visa, MasterCard and AmEx cards we’ve had for years.  Often, the choice of those cards has been based on loyalty programs—airline miles, hotel points, etc.  So, we go about daily life, buying, charging, amassing miles or points.  Sometimes, we even get to use those miles, though, if your experience tracks mine, you’ll sit for years with thousands of unused miles, some of which will eventually be lost to expiration dates.

When you travel out of the country, some new wrinkles enter into the credit card transaction. Most bankcards and American Express tack onto your charges, after currency conversion, a “Credit Card Foreign Transaction Fee”.  The rates are not small—from 1%-3% of your charged expenditures including hotels, meals, gifts, etc.  Individually, these aren’t such a big hit, but when you add up the total credit card charges on a multi-week family trip to Europe, you’ve wasted a decent amount of money.  Multiply this fee over a number of foreign trips, and through the years, the sums can be substantial. To keep up with updates on credit card offers and, specifically, foreign transaction fees, check out the Card Ratings website.

There are two financial institutions that still offer credit cards with no Foreign Transaction Fees (as of summer 2009).  Capitol One (800/410-0020) offers a No Hassle Miles Reward Credit Card, with one mile per dollar up to $1000/month in charges, and double miles above that.  There is no annual fee, but for the Ultra Card version of this program, a $39 annual fee gets you double miles on all transactions. Miles can be redeemed for airline tickets, hotels and rental cars at a value of one mile per dollar of travel cost.  You book your travel through any agent, website or vendor, charge it on your card, then redeem miles to cover the charges.  When redeemed, the net effect is close to a 2% cash back return, though the return is available only for travel purchases. 

An equally good deal is the Schwab Bank Invest First Visa Credit Card (866-724-9223). This one has no Foreign Transaction Fee, no annual fee and, in lieu of airline miles, offers 2% cash back on every purchase.  The only complication is that you will need to open a Schwab One brokerage account, where the cash back funds will collect.  There are no fees for the brokerage account, just a slightly more complicated application process, but there is an added advantage on the cash front, described below.

Carrying Travelers Checks, Cash And ATM Cards

There is no doubt that the ATM card has virtually replaced travelers checks.  My wife and I haven’t traveled with travelers checks in years, but instead have just withdrawn funds from bank ATMs around the world.  However, the travelers check option still exists, with a purchase surcharge of 1% of the value, plus a currency conversion commission of at least a 2% when converting to foreign currency abroad.  The good news is the added comfort of easy replacement for lost or stolen checks. 

Of course, you can always convert cash at an airport foreign exchange window in your country of destination.  We don’t recommend making that conversion at your departing airport nor at your hotel in the arrival city—the exchange rate will rarely be your friend in this situation.  And we always keep some euros or pounds or whatever for the next trip. 

With ATM withdrawals at foreign banks, you’ll get the best exchange rates (compared to travelers checks), but when you get your monthly bank statement, you’ll be surprised to find that “Foreign ATM Fees” have been added on each withdrawal.  (NOTE that these fees are on top of the ATM fee that will always apply when using a bank ATM not your own.)  The Foreign ATM Fee can be steep:  Bank of America charges a $5 surcharge plus 1% of the amount at non-affiliate banks.  However, they do have affiliates in many countries (Barclays Bank in the UK, BNP in France, Deutsches Bank in Germany), so you can work around the fee in some situations.  Citibank charges 3% of the amount; Chase, $3 per withdrawal plus 3%; HSBC, 1%. 

The rare exception to this added fee is, again, Capitol One.  With a Capitol One bank account, ATM withdrawals abroad involve no Foreign ATM fees.  Of course, you would have to open a bank account and deposit funds to cover your anticipated cash needs abroad.

If you opt for the Schwab Invest First Visa Card, then the companion brokerage account offers an optional debit card, which allows you to withdraw cash from the account at any ATM worldwide.  Before you go, you would just deposit enough funds in the brokerage account to cover your cash needs while away.  The added bonus for this card is that Schwab will reimburse any ATM non-bank-customer charges incurred anywhere in the world.  There is a Foreign ATM fee of 1% for cash withdrawals abroad. 

Though that’s more than the 0% fee at Capitol One, you have the advantage of already having this brokerage account open in conjunction with your credit card, and you get the refund on the normal non-bank-customer ATM fees. 

Shopper Beware – Some Caveats From My Wallet

Your strategy on both credit cards usage and ATM cards should be based on how long you’ll be abroad, how much you expect to spend, and whether it’s worth the bother of getting new cards and accounts.  You may want to just pay the fees -- just be aware of the cost.  After researching this story, we switched our credit card to one of the two non-foreign-fee banks.

Note that the worst possible way to get cash abroad is through a cash advance on your credit card. Not only will you pay a foreign transaction fee (1-3%), but you will pay interest on the amount of the cash from the time you withdraw it until you pay your bill, at rates of 12% and, often, much more.  Do not do this.  Use your bank ATM card, fee or no fee!!

In the spring of 2009 there remains much volatility in the credit card world, with major legislation newly passed to regulate the card companies.  The impact of this new regulation has and will continue to change some of the practices and rules of the credit card industry.  When planning your trip, check with your bank or credit card company to verify their current foreign ATM fees.

Direct Debit While Traveling

No matter which credit card you use, if you’re planning on being away for an extended period, it would be wise to set up Direct Debit, an automatic debit procedure through which your credit card balance or minimum payment is drawn down from your bank account on the due date.  Otherwise, if you miss that due date because you’re traveling, you will be liable for increasingly onerous late fees and interest charges.