How to cope with foreign transaction fees

Packing plastic for your holiday abroad? Watch out for foreign transaction fees, which can bloat the cost of your trip. Knowing how they work and what options you have can help you minimize these irksome charges. foreign-transactions

A foreign transaction fee is an extra charge tacked on after a credit card's padded currency exchange rate is applied. Typically, American Express, MasterCard and Visa determine the transaction fees while the card-issuing financial institution sets the currency conversion rate.

Usually, these expenses aren't enough to keep Canadians from using plastic while travelling. "Credit cards are generally still the safest method of payment particularly for large purchases," says Allison Wallace, media and communications manager at travel retailer Flight Centre Canada. "Travellers' cheques immediately identify you as a tourist and it is best not to carry large amounts of cash, so often the higher fee you pay using a credit card outweighs the risks of using other methods."

Still, with a little know-how and perhaps a new card, you might be able to get around the fees:

How much it can cost you
Credit cards from Canada's big five banks impose a standard 2.5 per cent foreign transaction fee. Using the Financial Consumer Agency of Canada's card selector tool, we discovered several Citizens Bank cards featuring a 2 per cent charge. Desjardins products had the lowest foreign transaction fee at 1.8 per cent.

Watch out for returns too. Card issuers re-apply the foreign transaction fee for refunds.

Debit cards aren't immune either. For example, Scotiabank foreign currency fees include 2.5 per cent of the converted amount for both debit and credit transactions.

Are transaction fees going away?
There is a perceptible trend in the U.S. toward eliminating credit card foreign transaction fees. A growing cohort of American cards charge no foreign transaction fees, and some even waive annual fees. And in the United Kingdom, Capital One Bank just announced that its Aspire World rewards credit card will not charge foreign transaction fees.

The trend doesn't appear to be gaining traction in Canada.

Spokesperson Laurel Ostfield confirms foreign transaction fees persist on all Capital One Canada credit cards, including the Aspire Travel World MasterCard. "We currently have no plans to change this policy," she says.

Only a handful of specialty credit cards enable Canadians to avoid foreign transaction fees. JP Morgan Chase, an American financial services powerhouse, issues the four cards listed below.

1. Marriott Rewards Premier Visa Signature Card
Introduced at the end of July 2012, this hotel rewards card excludes foreign transaction fees. It comes with enough rewards bonus points to pay for a free night stay at a Marriott hotel (up to Category 4), and earns 5 points per $1 spent at participating Marriotts, 2 points per $1 for other travel-related purchases and 1 point per $1 everywhere else. A $120 annual fee applies after the first year, which, for occasional travellers, could negate the benefit of no foreign transaction fees.

2. Amazon.ca Rewards Visa Card
This card allows you to shop outside Canada without fear of foreign transaction fees. It also gives you 2 per cent cash back for every dollar spent on Amazon Canada's website, and 1 per cent for purchases elsewhere. No annual fee applies.

3. Sears Financial MasterCard
This retail rewards product provides 2 Sears Club points for every dollar spent at Sears, one of Canada's largest retail chains, and 1 point per dollar charged elsewhere. The card has no annual fee and charges no foreign transaction fees.

4. Sears Financial Voyage MasterCard
In addition to mirroring rewards under the Sears Financial MasterCard, the Voyage MasterCard gives 3 Sears Club points for every dollar spent on Sears Travel and 1.5 points per dollar charged on gas, groceries and travel merchant purchases. While there is no foreign transaction charge, you do have to pay a $39 annual fee.

Playing the U.S. currency card
Card company representatives often promote U.S. currency credit cards as the best way to circumvent foreign currency transaction fees.

While a viable alternative, this option does come at a cost. Cards including the BMO U.S. Dollar MasterCard and TD U.S. Dollar Visa Card collect an annual US$39 fee. And if you pull out U.S. dollar plastic for overseas purchases in another currency, a 2.5 per cent foreign transaction fee kicks in.

Managing foreign transaction fees
Flight Centre's Wallace has found that customer concerns over foreign transaction fees are usually not make-or-break worries for Canada-to-U.S. travel. This is partly because of how frequently Canadians visit nearby American destinations, and also because many Canadians are keenly aware of the loonie's transaction rate versus the U.S. dollar.

"When the Canadian dollar is doing well, we definitely see a boost to travel across the border," observes Wallace.

She says foreign transaction fees become more of an issue for costlier overseas trips to exotic destinations. "If people are planning a big trip like that, they usually take [foreign transaction fees] into consideration and have an expectation that they need to budget for fees related to currency."

Asked about other ways to mitigate foreign transaction fees, Wallace comments, "I always advise people to consider pre-paying while still in Canada for tours or other such add-ons to ensure the best deal."

See related: How to get a U.S. dollar credit card, Ensure smoother sailing with travel insurance

Updated April 28, 2016

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