When shopping overseas, a merchant may ask you if you would like to convert your credit card transaction from the local currency into U.S. dollars. This is called Dynamic Currency Conversion (DCC), and while it may sound like an enticing offer, this conversion is very expensive for the cardholder and should be avoided.
Generally, when an overseas merchant makes this offer, they will use a conversion rate that is far higher than the actual going rate, as high as 7 percent, and pocket the difference as a fee. They get away with it because many customers are not checking the math at point of sale to make sure the conversion was accurate.
Some customers incorrectly assume that if they do the currency conversion this way that they can avoid the foreign transaction fee. On the contrary, the credit card company will generally charge the foreign transaction fee in addition to the charge made from Dynamic Currency Conversion. The credit card company is simply charging the customer for a transaction made abroad, and not for the actual currency conversion.
By avoiding Dynamic Currency Conversion and using a credit card without a foreign transaction fee, you can save yourself an extra 10 percent (7 percent DCC + 3 percent foreign transaction fee) on each of your purchases.