Avoiding Credit Card Foreign Transaction Fees

Imagine that you just got back from a trip abroad or finished checking out a cart through an international online retailer. You check your credit card statement and are shocked to find that you’ve incurred additional charges. Upon further inspection, you realize these are foreign transaction fees.

Foreign transaction fees apply when you use your credit card to make purchases in another currency. While they may seem small, they can add up quickly. In this article, we’ll review these charges in depth, discussing how they work and how to avoid them.

How exactly do foreign transaction fees get calculated in Canada?

A foreign transaction fee is that extra charge you see on your credit card when you make non-Canadian dollar purchases. In Canada, this charge is usually around 2.5% and will be posted to your credit card statement in addition to the original charge that factors in a foreign exchange rate. To put this into dollar terms, for every $100 spent (after currency conversion) you’ll pay an extra $2.50. At first, this may seem like an insignificant amount, but it can add up over time. Especially when planning vacations in foreign countries or making sizable international purchases online.

When will I be charged?

You will see a foreign transaction fee on your account anytime you make a non-Canadian dollar purchase. For example, if you are online shopping through an international retailer, then you may pay in USD or EUR instead of CAD. In this case, most credit cards will charge you a foreign transaction fee of 2.5% of the transaction’s value. I know I’ve seen this charge before when purchasing from what I thought was a Canadian site. As it turns out, it wasn’t, and I paid extra as a result.

You might also collect these charges when you’re planning a trip. If you book a hotel or purchase a flight in another currency, then the foreign transaction fee will show on your card. This will also happen if you use your card while you are abroad on that trip. Everything from restaurant bills to gift shop purchases can trigger this fee.

Any time you are buying something in another currency, it is safe to assume you will find a foreign transaction fee on your card. Unless, of course, you plan ahead and put a strategy in place.

The best way to avoid foreign transaction fees

As a digital nomad, and someone who makes the majority of my purchases in foreign currencies, I am the first to admit that these additional costs can accumulate quickly. But you aren’t out of luck. The best way to avoid these charges is to get a credit card that waives foreign transaction fees completely. While our American neighbors have plenty of no forex fee credit cards available at their fingertips, in Canada, we have limited options. But there are still a few. For the complete list, see FinlyWealth’s post on the best no foreign transaction fee credit cards. I personally use one of the cards on this list and can confirm that it has saved me what feels like a small fortune in foreign transaction fees.

It’s important to note, however, that most cards that waive these fees are not free. They come with an annual fee. So before you commit to a card, consider its benefits and the savings that it may bring. Ask yourself: Is this card worth the cost? Or is it better to just pay the foreign transaction fee on occasion?

While a couple no-foreign-transaction fee credit cards avoid annual fees (like the Home Trust Preferred Visa), they tend to lack added perks.

Those who frequently shop in US dollars can also consider a US dollar credit card. Many Canadian banks, including RBC and Scotiabank, offer this option, allowing you to earn points or cash back on your USD purchases. Another option to consider is the Meridian Visa US Dollar Card.

Other costs to watch out for

While foreign transaction fees are a typical charge you will see when spending in another currency, there are also other costs to keep an eye on. Cash advances, or withdrawing money from your credit card, is one way to get hit with extra fees. Here, you can get charged both a cash advance fee and a foreign transaction fee. Ideally, avoid this where possible.

Also, watch for the dynamic currency conversion (DCC) feature. If you have ever used your credit card abroad, you may have seen this in action. With DCC, a merchant will allow you to select whether you want to pay for the transaction in Canadian dollars or in the local currency. DCC is often the more expensive route, so a good rule of thumb is to pay in local currency whenever you are given the option, not CAD.

Another cost to consider is the exchange rate spread. Even if you have a no foreign transaction fee card and select to pay in the local currency, the exchange rate charged by the card could be elevated. In turn, this means you are paying extra. As explained in FinlyWealth’s article Are Credit Card Exchange Rates Good, these rates are typically competitive when using major credit card providers like Visa, Mastercard and American Express. But it doesn’t hurt to check the Visa and Mastercard exchange rate calculators to get a better idea of what you are really paying.

My personal strategy

As someone who is constantly spending in foreign currencies, minimizing foreign transaction fees is a priority for me. The best way I have found to do this is to:

1.      Use a no-foreign-transaction-fee credit card

2.      Always pay in local currency when possible

3.      Use a fintech account as a backup (like Wise)

Combining these three methods has saved me hundreds (if not thousands) at this point.

Takeaway

Regardless of your personal spending habits, you may occasionally see foreign transaction fees on your credit card. At 2.5%, these charges may seem small, but they can add up over time. Especially if you are constantly spending money abroad.

The good news is that you can avoid foreign transaction fees by picking thesearching for the right credit card and creating a strategy for foreign currency spending. Whether you are online shopping from your bedroom in Vancouver, gallery hopping in Paris, or taking a cooking class in Bangkok, there are countless ways to save on fees, it just takes a bit of planning. Ultimately, that planning can go a long way and add up to real savings over time.