Credit cards: Foreign currency transaction charges explained — Here's how the mark-up fee is calculated

A line of flexible, short-term borrowing, credit cards assist with tracking expenses, simplify payments and offer valuable benefits from banks and lenders, besides helping build your credit score. However, they are also among the personal finance tools with the highest interest rates and have a slew of additional charges and fees attached.

Credit cards charges and fees include joining fee, annual fee, cash advance fee, overlimit charges, late payment charges, reward redemption fee, foreign currency mark-up fee and transaction charges, lounge access and concierge charges. For first-time users, it is especially important to do adequate research and compare various cards available to check for which is best suited for your needs, especially.

It is advisable to make a choice carefully rather than picking the first name you see. Compare at least three or four cards for factors such as annual fees, interest rates and rewards and perks. You must also take into account the other fine print before making a final choice. Ensure you grasp this information prior to applying for the card.

Foreign transaction fee: When is it applicable?

A foreign transaction fee is applied for use on credit cards when you conduct a retail transactions outside of India, when you complete an online transactions made in a foreign currency, when ATM cash withdrawals are made overseas, when transaction is made in India, but the point-of-service (POS) machine is linked to an overseas account e.g. duty-free shops, and any other transaction made in foreign currency.

Credit cards: Foreign currency mark-up fee, explained

Credit cards that are allowed for use in foreign countries are subject to extra fees known as the foreign currency mark-up fee. While this fee differs from card to card and among lenders, it usually ranges between 1-3% of the transaction amount.

According to Paisabazaar, for a $30 item bought using your foreign transaction enabled credit card, on the bank's end, the sum is converted into Indian rupees (as per the exchange rate on date of transaction) for calculation of fees. Assuming mark-up fee of 2% and that $1 is worth ₹90 at time of transaction, the calculation is as follows:

• Transaction amount = ₹2,700 ($30)
• Foreign currency mark-up fee = ₹54 (2% of transaction amount)
• Goods and services tax = ₹9.72 (18% on mark-up fee)
• Total value of transaction = ₹2,763.72 ($30.70)

What happens in case of foreign transaction in currency other than US Dollar? In such cases, the transaction amount is converted into USD before the usual calculation process takes place. It is the total transaction value that will be reflected in your final credit card statement.

Notably, some exceptions do exist for this fee with premium credit cards and travel-focused credit cards.

What other charges apply to foreign transactions?

• GST: All credit card transactions are subject to prevailing goods and services tax rates (currently at the rate of 18% GST). Notably, this is applied at different points on the annual fee, interest payments and processing fees for EMIs, etc.

• Cash Withdrawal Fee: Similar to charges at domestic ATMs, cash withdrawals overseas also incur charges between at least ₹100-300 (sometime more).
• Finance Charges: This comes into play if you fail to make your credit card payment within the due date and can range between range from 23-42% across card type and issuers, according to Paizabazaar.
• Reward redemption fee: Credit cards issuers usually charge a ₹99 fee per redemption request when you use your reward points. The charge may differ across lenders.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.