Oops. No way did the credit card companies want to lose out on their hefty fees. Visa International took in $424 million in currency exchange fees for the fiscal year that ended September 2004, according to Robertson of the Nilson Report. That's nearly 30 percent of its annual revenue, he said.

This past April, Visa began adding a 1 percent fee onto any foreign transaction, whether dynamically converted to dollars or charged in local currency. But then in June, it suddenly rescinded the move, and went back to the previous policy of charging a 1 percent fee only on transactions made in foreign currency. In a statement, Visa said it made the change to "address issues raised by cardholders, merchants, and member financial institutions." In other words, almost everybody was upset. The company is "now reviewing the fee structure related to single-currency cross-border transactions," according to Rhonda Bentz, Visa's vice president of public affairs.

MasterCard currently charges 1 percent on foreign currency transactions only, but has announced that, in October, it will switch to charging 0.8 percent for all foreign transactions, with an additional 0.2 percent fee for transactions made in foreign currency.

Hefty Penalties

Whether you get socked with these fees -- and more -- all depends on the bank that issues your credit card. Some issuing banks, such as MBNA [and Citi, in this case], are charging fees on any foreign transaction, regardless of whether you pay in dollars or local currency. According to MBNA spokesman Jim Donahue, the company levies a flat 3 percent fee on every foreign transaction; in the case of a charge made in foreign currency, MBNA absorbs Visa's 1 percent currency conversion fee.