With new credit card rules squeezing profit margins at major banks, foreign travelers have become an even easier target for special fees and surcharges. Credit card issuers have traditionally imposed foreign transaction fees to offset the cost of fraud prevention and currency exchange services. Many banks now generate profits from foreign transactions, forcing savvy visitors to hunt for the best deals among issuers.

Saving Money by Using Credit Cards Abroad

Using plastic to pay for travel expenses often means saving time and money abroad, especially when compared to cash alternatives. When carrying currency, you bear the risk of losing all that cash to a pickpocket or to a slippery wallet. Travelers checks reduce that risk, but incur transaction costs on the fly. Besides, standing in line to convert your travelers checks into local currency can take a huge chunk out of your day.

Credit cards convert currency based on each morning's best market price. For instance, when I traveled to the U.K. in November 2009, the pound traded at $1.60. A ten pound taxi ride converted to $16, and the 3% fee from my Bank of America Visa added roughly fifty cents to my bill. Had I converted cash instead, I would have paid $1.80 per pound, or $2 more. Even with the foreign transaction fee, swiping a Visa saved me money.

Common Foreign Transaction Fees

A February 2010 survey of foreign transaction fees conducted by the New York Times revealed a wide range of foreign transaction fees:

• Capital One- No Foreign Transaction Fee
• American Express - 2-3%, depending on member status
• Bank of America - 3%
• Chase - 3%
• Citibank - 3%
• HSBC - 3%
• Wells Fargo - 3%
• Discover Card - 2% - Accepted in China, the Caribbean, Central America, Mexico and certain parts of Europe.
• Pentagon Federal Credit Union - Varies depnding on the card product

Capital One remains a powerful exception to the rule. Its bank branches in both the United States and the United Kingdom give it a competitive advantage in America and Europe. Therefore, Capital One charges no foreign transaction fees of any kind. Best of all, Capital One's Web site lets you apply same-day payments from any pre-registered checking account. I used my Capital One MasterCard for most of the expenses on my week-long trip, saving me a few hundred dollars. When some unexpected souvenirs got me close to my credit limit, a quick payment from the Web browser in my hotel's business center allowed me to keep saving money.

The PenFed Promise VISA Card also offers no foreign transaction fees.

Watch the Register for Unexpected Credit Card Fees

Credit card users don't necessarily have to leave American soil to encounter foreign transaction fees. Some banks charge these fees for purchases made inside American territories, such as the U.S. Virgin Islands or the Dominican Republic. Internet transactions processed through overseas companies also trigger foreign transaction fees. When dealing with foreign-operated specialty retailers, inquire whether sales will be processed domestically or through an overseas payment network. An unexpected fee can turn a relative bargain into a money pit.

Some foreign retailers now offer American shoppers the option to pay for purchases in U.S. dollars instead of in local currency. In fact, choosing "dollars" at checkout often leads to double surcharges. Retailers offering on-site currency transaction almost always use a conversion ratio far higher than that of credit card companies. One store I visited in London would have added an additional 10% to my "USD" purchase, compared to market rates. Furthermore, the sale would still have triggered a foreign transaction fee, even if no currency conversion were processed by the bank.

Shopping around for a credit card that's travel-friendly can save you money while ensuring a stress-free trip. Capital One and American Express offer some of the best values for travelers, especially when combining hotel and airline purchases with rewards programs. Some annual fee cards can pay for themselves through special savings or with an effective emergency card replacement program. Remember to notify your card company before you leave the country, to prevent a "false positive" from the fraud department.