Foreign Transaction Fees for Credit Cards

Credit cards are super handy when you’re traveling. They make life easier, make shopping more convenient, allow you to make purchases without carrying so much cash, and paying at restaurants is a cinch.

Credit cards are accepted in so many places, in almost all countries. But with that convenience comes a fee – at least, in most cases it does. When you spend on a credit card in a foreign currency, you’re often charged a foreign transaction fee on each purchase.

So, what is a foreign transaction fee? How are they calculated? And do you have options to avoid them? Read on to find out.

What is a foreign transaction fee?

A foreign transaction fee is a fee charged on purchases made in foreign currencies or that pass through a foreign bank. The fee is usually between 1-3 percent of the spend total (typically 2.5 percent in Canada), added after conversion rates have been applied. Foreign transaction fees differ between credit card companies and even between cards from the same provider.

This is an example of how foreign transaction fees work. Say you’re in Mexico and you use your credit card for dinner. That meal purchase will be subject to a foreign transaction fee. Similarly, say you buy something from a website in the United Kingdom or the United States or France and pay in pounds or US dollars or Euros, that’ll be subject to a foreign transaction fee too. Foreign transaction fees are intended to cover the processing cost of converting your transaction from a foreign currency into Canadian dollars.

Foreign transaction fees occur after your purchase has been subject to conversion. So, let’s say that Mexican dinner costs you 500 pesos. That 500 pesos would first be converted into Canadian dollars at a conversion rate set by the credit card company (conversion rates issued by your credit card provider are not the same as the Bank of Canada conversion rate, they’re higher and can differ from card to card). Then, on the converted total in Canadian dollars, you’d be charged a foreign transaction fee on top.

When am I charged foreign transaction fees?

Foreign transaction fees come into play anytime a transaction passes through a foreign bank. A foreign bank for Canadians is any bank that’s not in Canada, where the currency in use isn’t Canadian dollars. That could be any time you make a credit card purchase while you’re in another country, or any time you buy something online through a merchant located in another country. Sometimes, even if the transaction is charged in Canadian dollars, there could be a foreign transaction fee if the transaction is routed through a foreign bank.

How are foreign transaction fees calculated?

Let’s take another international transaction as an example. Say you spend $500 US dollars on a special fancy family dinner while you’re on vacation in New York. You pay for the meal with your Canadian-issued credit card, so this meal purchase will be considered a foreign transaction and is subject to a foreign transaction fee. Your final charge could be calculated like this:

Cost of dinner in US dollars (USD) = $500

Credit card company conversion rate to Canadian dollars (CDN) = $682.50

(Actual conversion rate to Canadian dollars, for reference = $680.20)

• 2.5% foreign transaction fee (CDN) on $682.50 = $699.60 total

In this example, there’s roughly $17 you’re giving to the credit card company on top of your purchase. (Dollar figures in this example are an indication only and were accurate on April 29, 2023).

That $500 meal is just one example. If you’re on a family vacation in the US for a week and you spend $4000 USD on your credit card on various purchases and activities, you’ll pay almost $140 in foreign transaction fees. That’s nothing to sneeze at – that $140 could be better spent on so many other things (a new pair of shoes, a year of Netflix, some groceries, gas, a nice bouquet of flowers, or anything else that’s for you and not going to the credit card company).

How do I avoid foreign transaction fees on my credit card?

Most credit cards charge foreign transaction fees – but, the good news is, they don’t all charge foreign transaction fees. If you don’t want to pay this extra fee every time you transact through a foreign bank, you need to get yourself a card that doesn’t charge foreign transaction fees.

When searching for a card that doesn’t charge foreign transaction fees, they’re usually pretty proud to mention it as a selling point. If you’re looking into different credit card options and a card doesn’t mention “no foreign transaction fees” as a benefit, the chances are that card will charge foreign transaction fees. So look for the cards that mention it in their main marketing bullet points.

Which credit cards have no foreign transaction fees?

Often credit cards that sell themselves as travel credit cards will waive foreign transaction fees as a benefit. Look for cards aligned with airlines or airpoints or hotel chains, or ask your bank which of their credit cards waive foreign transaction fees. You can also shop around online.

And, actually, KOHO has a card that fits the bill, plus another option that launches soon. The KOHO Extra card eliminates foreign transaction fees and includes one free international ATM withdrawal per month, which can help save another fee when you’re traveling. It’s worth considering.

KOHO cards are not technically credit cards. KOHO cards are prepaid Mastercards. You can think of them as credit card alternatives, with similar convenience and accessibility but with fewer fees, lower risk, and no accrued interest to repay. Because they’re prepaid, you only spend what you put on your account, which ensures you don’t overspend. In addition to the lack of foreign transaction fees and one free monthly international ATM withdrawal, the KOHO Extra card gives you up to 2 percent cash back on purchases, earns you 2 percent interest on cash in your account, and for $7 a month it also helps you build your credit score with KOHO Credit Building.