Co-badged debit cards: great in concept, awkward in practice

There was a time when credit cards and cash were your only payment options when travelling out of the country, because debit cards worked only on the Canadian Interac system. Not anymore.

Since CIBC became the first bank to offer them in 2010, Canadians now have access to "co-badged" debit cards -- badged with both the Interac and Visa (or, in some cases, MasterCard) logos on their face. Co-badged debit card holders have access to all main debit networks currently in operation: Interac in Canada and Visa or MasterCard internationally.

CIBC, TD and Scotiabank customers can use their debit cards as Visa cards for online and in-person purchases anywhere Visa is accepted outside Canada. And BMO issues MasterCard-branded debit cards that work anywhere MasterCard is accepted online and in stores outside Canada. co-badged-debit

As a concept, debit cards bearing the Visa or MasterCard logo seem like a smart payment option. But in practice, using co-badged debit cards can be confusing and awkward if you don't plan properly.

Foreign transaction fees still apply
The main thing to know before using your co-badged debit card abroad (or for a purchase from an international store online) is that foreign transaction fees, also called foreign exchange fees, still apply. This is the fee charged simply for using your card outside of Canada.

In TD's case, Visa Debit purchases made outside Canada are subject to exchange rates plus an additional 2.5 per cent of the converted amount.

Also, it's important to note that while deposits using a co-badged TD Visa Access debit card are free in foreign countries, there's an additional 2.5 per cent handling fee. That's in addition to the transaction fee on the converted amount for foreign currency withdrawals using the debit card at ATMs outside Canada.

Since the co-badged cards are debit, the money is coming directly out of your bank account.

"When travelling abroad, for transactions made using the TD Access Card with Visa Debit the foreign exchange rate is applied automatically, and the full amount is withdrawn immediately," says Cheryl Fricker, senior manager of corporate and public affairs for the TD Bank Group.

You must budget for these extra fees and ensure there are enough funds in your account to cover them. This is especially true if the debit card is connected to an account designated for travel that has a specific amount in it -- be sure you load the account with enough funds to cover your expenses and the extra fees.

You can't use it as a Visa or MasterCard in Canada
While co-badged cards work anywhere Visa or MasterCard is accepted internationally, they are of limited use in Canada. For example, you often can't use your co-badged card in Canada for online, phone or mail transactions. And while you can use the card as a debit card in Canada, you cannot use it for an in-country transaction that requires a Visa or MasterCard credit card.

Eric Matthews, an accountant from Lethbridge Alberta and blogger at ThatBookkeeper.com, learned this the hard way. His online transactions through U.S.-based companies were accepted, but when he tried to use his Visa debit card as a Visa credit card online with a Canadian-based company, his transactions were declined.

"Yes, it's a Visa debit card, but that doesn't mean it goes through Visa's regular channels," he wrote in a 2012 blog post. "The company you're purchasing from has to upgrade their merchant terminals to accept Visa debit for phone or online orders. So, just because they take Visa, doesn't mean they take Visa debit."

What Matthews discovered four years ago is still the case in 2016.

According to Visa's website, Visa debit cards are only accepted at "more than 42,000 online merchants and growing." While that may sound like a lot, it's not universal, so there is a chance you may use the card at a merchant that won't accept it. You can find a full list of online merchants in Canada accepting the co-badged debit cards on Visa's website.

MasterCard debit is accepted by even fewer online retailers in Canada. As of this writing, only 43 Canadian retailers accept Debit MasterCard online.

You could be in for some unpleasant surprises
Since these co-badged cards are debit, not credit, there are no annual fees, no interest charges and no monthly bills. But there might be pre-determined daily, weekly and monthly spending limits, meant to protect your account against fraud.

How might this affect you? If you're travelling and using the card as your only payment method, you may hit your limits sooner than anticipated. There also could be limits on each transaction, making it difficult to pay for flights or hotels, even if the funds are in your account.

It's also important to note that even though there is no interest applied to any debit purchases, if you have overdraft protection and your account goes into overdraft, there is interest charged on your overdraft.

Finally, keep in mind that the American market has been slow to adopt chip-and-PIN cards and has instead opted for chip-and-signature, so at restaurants particularly, the tip likely will be withdrawn as a separate transaction on top of the total. This means you may see two separate transactions for one outing on your statement.

As with any payment method used when travelling outside the country, keep a close on eye on your spending and your statements -- especially if you opt to use a co-badged card. That way, you might avoid any nasty surprises that could ruin your trip.

See related: How to save on foreign transaction fees, Is your credit card trip insurance enough?
Published September 1, 2016

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