Using credit cards abroad, another financial rip-off

Hobbes, let me comment you on one of those thinks that not everybody knows but should be of public domain. The other day I received my last credit card statement and it came along with an ‘Important information’ leaflet.

The usual suspects were there, fees are up, and conditions get more and more draconian and authoritarian than ever. But the fee that they charge for foreign transactions is the one I would like to comment you on this time. The fact that they increased the charge from 2.75% to 2.95% (a 7.27% rise, a bit over inflation, isn’t it?) is bad enough, but what I question is the existence at all of this fee.

I will not get into the debate on being charged in local or GBP when abroad (that’s a subject I don’t even wholly understand myself), it is the fact that they charge you the fee that nags me. Back in the days, a Spanish bank would even advise you to use your card abroad for payments and withdrawals because the international currency exchange was cheaper than getting your pounds, dollars or francs.

Coming back to today’s Great Britain and the worldwide travelling culture of the average islander I wonder, at a 2.95% the pop (and that is what Lloyds TSB charges, go guess the other banks), how much money do British banks make out of their customers globetrotting? The interesting amount would be ATM-fee free.

Hobbes, let’s say you go on a break to… mmm… Sweden. You get your Ryanair return from London Stansted to Stockholm-Vasteras (as much is Vasteras part of Stockholm as Cambridge is a corner of Trafalgar Square) for £19.99 plus unpublished £28.63 taxes/fees plus £18.00 because I check-in at the airport, carry one piece of luggage with me and today I feel special and would “like to be one of the first passengers to board to the aircraft” (add an extra £6.00). And that is after paying the £26.00 for the return train ticket from Liverpool Street station. Anyway, air travel hidden costs are a matter for an in-depth future post.

Hobbes, after you have spent £98.62 (not including travel card to/from train station), your budget for budget for your stay in Sweden is £300 that you spend in accommodation, sightseeing and maintenance, all paid by credit card/debit card at local prices. Not including ATM fees for withdrawals or fees to change back your Swedish Kronors into pounds, you have given away £8.85 to your bank because, because… I always get lost here. Why?

If the fee is originally set to cover money market fluctuations it would make sense, but I don’t see fluctuations if:

a) I pay by debit card and availability of funds (and hence exchange rate) is instantaneously checked (but not set)

b) I pay by credit card and i.e. Visa Sweden automatically communicates Visa UK of the purchase (and hence the kronor/GBP exchange) at the time.

All in all, you will end up paying £28.63 (7.18% of your £398.62 total trip expenses) in airport taxes/fees; £75 in VAT for the Swedish government (at a 25% VAT rate, perhaps you should have chosen Monaco for your city break) and £8.85 (2.22%) of the cost of your trip to your credit card supplier.

This is a financial rip-off from the banks like many others. You can choose to fly with someone else. You can choose to fly from somewhere else. Even not to fly at all or to a different destination. But you cannot stop using your cards abroad. We are plastic junkies and they know it.

I understand that there is some administrative cost involved in the process, but major banks are the owners of the card issuer companies in the first place! At least until now, since they are planning Visa’s long-awaited public offering for 2008 to strengthen their weakened balance sheets, and that is knowing that $19bn as the market goes sounds tough.

We’ll have a look into other payment options in the future. With a rocketing euro, minimising your trips abroad shouldn’t be difficult on the meantime.

.calvin

UPDATE 27/03/09: Since it keeps coming up everywhere, I’ll join in; Nationwide offers true comission free when using its debit/credit cards on purchases abroad and the Post Office offers the same service with its credit cards. Think about it if you travel often.

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