What is a foreign transaction fee?

Couple paying for pastries at the counter of a bakeryImage: Couple paying for pastries at the counter of a bakery

In a Nutshell

A foreign transaction fee is a fee you can be required to pay when using your credit card to buy things in a foreign currency. It’s typically around 2.5% of your purchase.
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Are you looking to avoid foreign transaction fees when travelling abroad with your Canadian credit card?

If you frequently travel abroad or make purchases online in U.S. dollars or other foreign currencies, it’s important to be familiar with the costs. A foreign transaction fee is a fee your card issuer can charge for converting your foreign purchases into Canadian dollars. For many credit cards, the foreign transaction fee is about 2.5%.

You may also see foreign transaction fees referred to as “foreign currency conversion mark-ups,” “foreign currency charges” or “foreign currency conversion fee.”

These fees can end up costing you big time if you’re not careful. Let’s take a closer look at foreign transaction fees and how to avoid them when travelling abroad.


How do foreign transaction fees work?

Depending on your card, you may be charged a foreign transaction fee when you use your credit card to make purchases outside of Canada or in a foreign currency. For example, when you use your card to pay for something in U.S. dollars when travelling to the U.S., or when buying goods or services from U.S. websites.

When you make a purchase abroad or in another currency, your credit card company can do two things.

  1. It can apply an exchange rate to convert the currency that you made your purchase in to Canadian dollars. In some cases, the financial institution that issues your card may even convert it to U.S. dollars and then to Canadian dollars.
  2. Once it’s been converted to Canadian dollars, you’ll be charged a foreign transaction fee as a percentage of your purchase amount. (This means that even if your purchase was converted twice, to U.S. dollars and then Canadian dollars, you’ll be charged the foreign transaction fee once.)

The currency exchange rate that your card applies to your purchase is often determined by the card network, such as Mastercard or Visa. Once your purchase amount has been converted into Canadian dollars, the foreign transaction fee is applied.

Here’s an example. Let’s say you make a purchase for $500 U.S. on your credit card.

  1. First, your $500 U.S. purchase is converted to Canadian dollars. Let’s say the going exchange rate is 1.32 Canadian dollars to U.S. dollars.

$500 U.S. x 1.32 = $660 Canadian

  1. Then, your card’s foreign transaction fee is applied. Let’s say it’s the typical 2.5%.

$660 x 0.025 = $16.50

  1. Add the two for the total amount you’ll pay for this purchase.

$660 + $16.50 = $676.50

Tips for avoiding fees abroad

Look for a credit card with no foreign transaction fee

When searching, review the credit card’s website and check for a foreign currency conversion or transaction fee.

It’s not so easy to find a credit card these days without a fee for spending abroad. Although you may be able to find one, you might still have to pay an annual fee. You’ll want to do the math to see if paying the annual fee in exchange for no foreign transaction fee is worth it to you.

Pay in the local currency

If you’re given the option, it almost always makes sense to choose to pay in the local currency when paying for goods and services abroad. For example, if you’re in the U.S and you’re given the option of paying in U.S. dollars or Canadian dollars, you’re probably better off choosing U.S. dollars.

Having the choice to pay in the local currency or have the transaction converted to your home currency is known as “dynamic currency conversion,” which certain retailers, restaurants and even ATMs have. If you’re given that choice, it’s usually better to pay in the local currency than to have it converted to the local currency, because that conversion will probably cost a lot more. And you’ll likely still be charged the foreign transaction fee anyway.


Bottom line

Next time you travel or make a purchase abroad, plan ahead to avoid being hit with a big foreign transaction fee.

Start by reviewing the credit cards that you already have. If you do a lot of foreign travel or make lots of purchases outside Canada, you might consider signing up for a credit card without any foreign transaction fees — but make sure that the amount you think you’d save in foreign transaction fees outweighs the cost of any annual fee that may come with the card.


About the author: Sean Cooper bought his first house when he was just 27 and paid off his mortgage at 30 in 3 years. An in-demand personal finance journalist, money coach and speaker, h… Read more.