Travel can be expensive and one of the extra costs is currency conversion. When you pay for purchases in a foreign currency there is almost always an extra cost involved. If you are travelling for a long time or spend a lot of money when travelling, your costs can be significant. Whenever I travel I always try to think ahead about how I can save costs on converting my money. I tend to avoid converting cash at the big banks because they are usually more money and I avoid converting currency at an airport because it’s the most expensive option.
Cheapest Exchange Options
Here is a quick guide to the cheapest ways to convert cash (beginning with the cheapest and ending with the most expensive option).
- Credit card (with no foreign exchange fee)
- Currency exchange business (such as Calforex)
- Credit card (with 2.5% foreign exchange fee) or debit card
- Transfer in person at a big bank
- Currency exchange at an airport
When making purchases online from a US-based store, you’ll most likely be charged in USD. Since most people pay using their credit card, this means there is an extra surcharge the credit card company charges to make the currency conversion. Most credit card companies charge an extra 2.5% for any foreign exchange transactions. This means you’ll pay an extra 2.5% on everything you buy using your credit card for foreign currency transactions.
Keep reading on how you can find a credit card that doesn’t charge a foreign conversion fee.
Using A Credit Card When Travelling
One drawback of making transactions in foreign currencies is that you could potentially lose money even if you return the item. The transaction gets converted when it is posted by the credit card company using the exchange rate at that date. If you return the item at a later date the refund will be processed using the exchange rate on that date which could mean a difference from when the original purchase was made. This means you could lose money on the foreign exchange difference.
The most obvious way to get around this is to request that the transaction is processed in Canadian dollars. However the drawback with this strategy is that Canadian credit card companies are required to only charge an additional fee outlined in the credit card agreement. If you request the transaction be processed in Canadian dollars you could potentially end up paying even more because foreign merchants are able to charge more money for the conversion and aren’t governed by Canadian laws.
When in doubt, most travel experts agree that credit card transactions in a foreign country should be done using the foreign currency. It means you will pay an additional fee (if your credit card charges one) but your fees will be limited as outlined in the credit card agreement.
Credit Cards With No Foreign Conversion Fee
Luckily there are a few good credit cards available that waive the currency conversion fee. Here are a couple options:
- Amazon Rewards Visa. This card allows you to get 2% cash back for every $1 spent on Amazon.ca and 1% cash back for every $1 spent everywhere else. It has no annual fee and also comes with a $20 Amazon.ca gift certificate when approved.
- Chase Marriott Rewards Premier Visa. This is a travel rewards card that gives 30,000 bonus points after the first purchase that can be redeemed for 4 free nights at a Marriott hotel. Card holder also get a free night stay on their card anniversary date (valid for 6 months after). Card holders earn 5 points for every $1 spent at a Marriott hotel, 2 points for every $1 spent on airfare and 1 point for every $1 spent everywhere else. The biggest drawback of the card is the annual fee of $120 (waived for the first year). If you don’t travel much or stay in Marriott hotels often this likely isn’t the best card for you.
For most people who travel occasionally the Amazon Rewards Visa is likely the best credit card to use when travelling. It has no annual fee and you’ll save on all foreign transactions because they waive the currency conversion fee. Also, 1% cash back on all purchases can really start to add up.
Other Credit Card Options
If you’re not interested in a rewards card, you can also pick up a U.S. Dollar credit card from most major banks.
For example, most banks offer a US dollar Visa/Mastercard which doesn’t charge a currency conversion fee. All US purchases are billed and paid in US dollars. The big drawback of these cards is that they have an annual fee (usually around $35 USD) and they also require a US dollar bank account to pay for the US transactions, and these bank accounts also have monthly fees.
However, it may be an option for anyone who already has multiple products with one bank since most banks will consider waiving both the annual fee and bank fees for long time customers.
Here is a quick summary of the annual fees for each major bank’s US dollar credit card:
- TD Canada Trust - $39 USD
- BMO - $35 USD
- CIBC - $35 USD
- Royal Bank - $65 USD
- Scotiabank - $35 USD
Currency Conversion When Travelling
If you don’t have access to a credit card with no foreign currency conversion fee, you’ll want to exchange some cash.
The second best option is to use a foreign currency exchange business. In my experience currency exchange places like Calforex tend to give slightly better rates than the big banks. This is because they charge a transaction fee and a slightly better rate, whereas the big banks don’t have a transaction fee but also charge a higher rate. If you’re travelling for a long time and have a lot of currency to convert you may want to consider converting large amounts at once rather than smaller amounts more frequently to keep transaction costs low.
Avoid Getting Ripped Off
Here are some of the most expensive currency conversion methods to avoid:
- Currency exchange at an airport. Virtually all major airports offer currency exchange services and the convenience of being located at an airport comes at a cost. Be prepared to spend almost 10% more converting cash at an airport than using a credit card with no currency conversion fee (the cheapest option).
- Converting at a big bank. The big banks all offer currency conversion and they also charge some of the highest rates. This option is about 3-5% higher than using a credit card with no currency conversion fee.
- Using a debit card. If you pay for foreign currency transactions using your debit card you will pay using the bank’s rate and they will also charge a conversion fee. This should be avoided unless it’s necessary.
A Note On Norbert’s Gambit
A simple method to save money on U.S. currency conversions involves using an exchange-traded fund (ETF) that tracks the currency - this method is called Norbert’s Gambit. It is popular with investors but can also be used by anyone looking to convert some cash at a low cost.
Norbert’s Gambit can be accomplished in 3 simple steps. The first step is to buy some of the Horizons US Dollar ETF (trading under the symbol “DLR”). It’s important that you buy the Canadian version (DLR.TO) when converting from Canadian to American currency. The next step is to transfer (journal) the shares over to the American version, DLR.U. If you use a low cost brokerage like Questrade, this can usually be done by emailing them a request (at no charge). The final step is to sell the shares of DLR.U - once this happens you’ll have the proceeds in American dollars which you’ll need to transfer to a US Dollar bank account to withdraw as cash.
One potential drawback of this method is that you’ll need to wait a while after the initial trade settles before requesting the shares to be journalled over (typically 2-4 days) during which time the exchange rate could fluctuate.
The cheapest way to convert currency is to use a credit card that doesn’t charge a foreign currency conversion fee. If this isn’t feasible, you’ll want to visit a foreign exchange conversion business like Calforex before departing so you can avoid having to convert currency at the airport. You’ll also want to avoid converting currency at a big bank since they also tend to charge higher rates.