Foreign transaction fees: what they are, and how to avoid them

A foreign transaction fee — sometimes also called an international transaction fee — is a surcharge applied to your credit card for any transaction that happens outside of the country. This can be applied both when you are physically outside of Canada, and for anything you purchase online from an international retailer.

This means, in addition to having to consider the exchange rate, you also need to think when you may incur foreign transaction fees when you are traveling abroad and shopping online.

Your credit card issuer will always say in your contract how much the foreign transaction fee is, so remember to read your card agreement.

You can expect to be dinged between 1% and 3% in foreign transaction fees when using Canadian credit cards for purchases outside of the country. CIBC, for example, charges 2.5% foreign transaction fees on its credit cards. And the same is true for most TD credit cards.

Let’s say you’re visiting Paris and decide to splurge on a nice handbag that costs about $2,000 CAD. At 2.5%, you would pay an extra $50 in foreign transaction fees (2.5% x $2,000). That means your total cost on that splurge has suddenly gone up.

Even if you aren’t making one big purchase, meals and drinks are foreign transactions that can add up quickly.

The foreign transaction fee will be added at the time of purchase. That’s how these costs can stack up — if you end up using your credit card for every little thing you buy, that’s a lot of individual transaction fees.

With smart planning, you can avoid additional credit card charges while travelling abroad. Many banks offer no foreign transaction fee credit cards. These include many cards specifically designed for the frequent traveller.

Where you travel can also make a difference. For example, some credit card issuers offer American credit cards for Canadians. Not only do you avoid foreign transaction fees on U.S.-based foreign purchases with these cards — you can also build a credit history in the United States, which is super helpful if you plan on living or working there in the future.

While they might sound like one and the same, a foreign transaction fee and a currency conversion fee are actually two different things.

A foreign transaction fee is applied to any purchase made in a foreign country or at a foreign merchant. A currency conversion fee is applied by either your credit card payment processor or a foreign merchant to convert the transaction into Canadian dollars. If your credit card issuer applies the fee, it’s often bundled into the foreign transaction fee.

Where it gets complicated is if you opt to use Dynamic Currency Conversion (DCC) — where a foreign merchant gives you the option to make a credit card purchase in either local currency or Canadian dollars to avoid any complicated currency conversion math. You aren’t obligated to use DCC, though. The merchant has to give you the choice, and it’s important to understand that it comes at a price.

If you use DCC, you will likely pay more because the exchange rate won’t be as competitive as what your credit card issuer would offer. If you say no to DCC, your card issuer will absorb the conversion fee and apply it to your statement at a better exchange rate.

This is why it’s in your best interest to get a no foreign transaction fee credit card and pay in local currency. Make sure to read your card agreement closely to see exactly what you’re paying for.

International debit transaction fees are typically around the same as those you’ll pay on your credit card, though it’s important to read the fine print of your banking agreement.

For example, the TD Access Card, which is a Visa Debit, charges 3.5% for foreign transactions. You’ll also be charged that same amount if you use an international ATM.

The easiest way to avoid foreign transaction fees is to apply for a credit card that has none. Luckily, you’ll find most banks in Canada offer at least one credit card that has no or very low international transaction fees.

Sometimes, these are also rewards cards that allow you to earn travel points, earn cash back, and more.