**Special to The Just Word Blog from Barry Choi, a personal finance and travel expert atmoneywehave.com**
Over the years, card payments have become increasingly popular. Not only is it easier to tap for your purchases, but some stores have gone completely cashless. As a result, most Canadians carry at least one credit card when they shop.
While there’s no denying the convenience of credit cards, one thing that may catch people off guard is the foreign transaction fee. Whether it be online or in-person purchase, this fee is applied when you make any purchase not in Canadian dollars. Fortunately, there’s an easy way to avoid this fee.
How credit card foreign transaction fees work in Canada
In Canada, most credit cards charge a standard foreign transaction fee of 2.5%. Many people don’t realize this fee exists because it’s calculated right into the exchange rate that appears on your statement. In addition, the mention of foreign transaction fees only shows up when you sign up for a credit card and in the cardholder agreement. Let’s be honest; not many people read those documents in detail.
While 2.5% may not sound like a lot, it adds up. Let’s say you’re taking a family vacation, and you spend $4,000 abroad. That’s $100 you’re paying in fees, which could be enough for a nice meal.
How credit card exchange rates work in Canada
To further complicate things, the three major credit card providers: Visa, Mastercard and American Express, each have their own exchange rates. Both Visa and Mastercard publish their daily exchange rates online. However, American Express does not reveal its exchange rates publicly. In other words, depending on the type of credit card you pay with, the exchange rate will be slightly different.
The good news is that all three providers have rates similar to the official exchange. Of course, if your card charges you foreign transaction fees, you must add 2.5% to that rate to calculate how much you’re being charged in Canadian dollars.
How to avoid foreign transaction fees in Canada
Some credit card providers have recognized that Canadians don’t like paying excessive fees and have introduced credit cards without foreign transaction fees. Having this benefit is great, but you still need to consider the earning rate, benefits, and annual fees that come with the card.
A card with no annual fee and no foreign transaction fees is ideal for your wallet. This way, you’re not spending any extra money. That said, some credit cards with an annual fee come with no foreign transaction fees and great benefits. These cards can be great if they align with your spending and travel goals.
Interestingly, even though the American Express Platinum Card is one of Canada’s best travel credit cards, it still charges foreign transaction fees. Another consideration is the American Express Cobalt Card. Even though that card also charges foreign transaction fees, you’ll earn 5 points per dollar spent on eats and drinks anywhere in the world. The points you earn are worth more than the fee you’re paying.
Quite often it makes sense to carry more than one credit card when travelling. You can have one that provides you with travel benefits and another no fee one that has no foreign transaction fees. This is also a good strategy since it gives you a backup card in case your primary card doesn’t work, or you lose it.
Making purchases abroad with your Canadian credit card
When you make a purchase abroad with your Canadian credit card, some merchants will give you the option to pay in the local currency or Canadian dollars. Selecting Canadian dollars may seem natural, but it could cost you more, even if you’re using a credit card without foreign transaction fees.
The local currency is always the best choice because the payment processor sets the exchange rate. There’s no extra fee if you have a credit card without foreign transaction fees. However, when you select Canadian dollars, the merchant often sets that exchange rate. In many cases, that exchange rate is inflated. That’s why you want to stick to the local currency.
To complicate things further, if you make a purchase in a foreign currency and don’t have a credit card without foreign transaction fees, you’re hit with the 2.5% fee both ways if you need to make a return. That means you’d be losing 5%, and you’d have nothing to show for it. That’s why having a credit card with no foreign transaction fees is essential.
What do when you need cash
You can use your Canadian debit card at U.S. bank ATMs, but a foreign exchange fee of up to 3.5% could apply. In addition, you may need to pay a one-time fee to the ATM owner. This is a quick and easy option if you don’t need much cash. That said, exchanging money back at home at your bank will offer similar rates without you having to search for an ATM while you’re abroad.
Some prepaid cards with no foreign transaction fees, such as the EQ Bank Card, are also a great option since you can use ATMs without paying FX fees. That said, the local ATM will likely charge you a one-time usage fee.
Final thoughts
While exchange rates and fees on credit cards may appear minimal, they add up over time and will cut into your bottom line. Your best bet is to get a credit card with no foreign transaction fees to keep your costs down.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of Justwealth, or its employees. The content of the article is provided solely for information purposes only and should not be construed as advice of any kind.
