Thursday, March 24, 2022

Avoiding Currency Exchange Fees for Snowbirds

With each passing year I’ve been spending more time in the U.S. during Canada’s winter.  When I was young I embraced winter, but not so much now.  I guess I’m becoming a snowbird.  Over the years I’ve paid a lot in currency exchange fees, but I’ve finally done something to cut these fees.

Until recently, I just used a Canadian credit card to pay amounts charged in U.S. dollars.  This has felt painless, because the credit card company automatically applies an exchange rate so I can pay my bill in Canadian dollars.

Hidden in the exchange rate my credit card company uses is an extra 2.5% fee.  Most people, myself included, don’t know the exact fair exchange rate between Canadian and U.S. dollars at any given moment, so it’s easy to forget about this extra fee.  However, almost all Canadian credit cards charge this extra 2.5%.

So, when I recently spent a little over US$6000 to rent a nice place and was charged nearly CDN$8000 on my credit card, roughly CDN$200 of that was the extra currency exchange fee.  Ouch.  I decided to get a U.S.-dollar credit card and a U.S.-dollar account to pay it from.

As a retiree, I maintain a cash buffer at all times, and I don’t mind holding some of this cash allocation in U.S. dollars.  However, I do want any significant amount of cash I hold to pay some interest.  This rules out any of the big banks’ accounts.

Fortunately, EQ Bank has a U.S. account that pays 1% interest, so I now have one of these accounts along with a BMO U.S.-dollar MasterCard.  I have it set up to automatically pay my bill in full each month from the EQ account, and the first payment went smoothly.  So far, so good.

(Disclaimer: For concreteness, I decided to be specific about the bank account and credit card I used, but I get nothing from these companies for naming their products.  I may go elsewhere at any time if a competing product looks better.)

A Snag

I did run into a curious problem that’s not a show-stopper, fortunately.  While EQ’s Canadian-dollar accounts allow you to pay bills, their U.S.-dollar account doesn’t.  So, if I go into my EQ online banking and try to manually pay my credit card bill, it won’t work.  I also tried going into BMO’s online banking to manually pay my credit card bill from my EQ account, but they only allow manual payments from a BMO account.  

So, I’m in a strange position where my credit card bill gets paid automatically from my EQ account, but I can’t do it manually.  If I get close to my limit and want to make a manual payment, I have to transfer U.S. cash from my EQ account to a U.S. bank account at BMO.  (I have one associated with an Investorline account.)  This process can take a couple of days.  Then I can pay the credit card bill from the Investorline account.  The process seems silly, but apparently unavoidable.

A Near Complete Success

So, now I can live in the U.S. for part of the year without paying the 2.5% currency exchange fee, and I get some interest on my U.S. cash savings.  The only irritation is the inability to manually pay off the credit card directly, but I find this restriction tolerable for now.

12 comments:

  1. Hi Michael, did you consider no foreign exchange fee credit cards? There are some good no fee ones like Home Trust and Brim. And it would work across the world and not just US. You can't of course time bulk currency exchange, like you could possibly do now though.

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    1. I did consider such cards, but I didn't investigate. I recall noting at one time with a card that had the 2.5% foreign exchange fee that the fee seemed to be larger than 2.5%, closer to 3% (on average) for that card. I was told that there was some cherry-picking of the exchange rate during the day. I have no idea if that's actually true, and I don't know if it's true of the cards with no foreign exchange fees. This is part of what led me to my current solution.

      That said, if such gaming of exchange rates isn't happening, then using a credit card with no foreign exchange fees while traveling outside Canada is likely a better solution for most people.

      In my case, because I spend so much time in the U.S., I'm happy to hold U.S. assets to reduce my overall foreign exchange risk.

      As for timing bulk currency exchanges, I have no useful insight into the future of exchange rates, and I don't try to time my exchanges.

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  2. For me, it has been well worth investigating the Brim card, Michael. I imagine you would qualify for the World Elite card, which offers a 2% hassle-free rebate on all spending, including in foreign currency. It also provides various travel insurances that are among the best I've seen. The annual fee is hefty, but is wiped out for the first year and negotiable thereafter. In the way of these things, Brim also offers sign-up "bonuses". I've checked on the exchange rate (as opposed to the currency exchange fee) for MasterCards in the past. It was consistently better than the rates that banks charge for consumer currency purchases, at least according to the Bank of Canada website. If I were deciding based only on that, I would check to see whether that's still the case before I went in whole hog. Now I'll admit I'm chuffed as all get-out if I have managed to advise Michael James :)

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    1. I'm open to checking out other solutions, but it is work. What I'm interested in is the gap between foreign exchange rates as charged by a credit card and the fair exchange rates listed on the Bank of Canada website. It's necessary to take a long-term average to average out any artifacts. Possible sources of a long-term difference are 1) an explicit fee, such as the common 2.5%, and 2) cherry-picking a favourable time to lock in the exchange rate for a given transaction.

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  3. I also have the Brim World Elite Master Card with no Forex Fees that I use for my Foreign purchases. I also have Rogers World Elite. While Rogers does charge a 2.5% forex fee, for US Dollar purchases, they provide a 4% cash back, which results in a net 1.5% return.

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    1. I went looking for the Rogers World Elite card, but the one I found gave 3% cash back.

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    2. I have Rogers World Elite as well. When they released a card - it was 4% cash back on foreign currency purchases, but they now lowered it to 3%. Which still covers the 2.5% exchange fees and allows to hold cash in CAD

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  4. Hi Michael. Where are the US dollars coming from in the first place to put in the EQ account? Are you liquidating USD assets from your investment accounts, where those assets were originally purchased using Norbert's Gambit? Just trying to pinpoint how the exchange rate savings are being engineered. Thanks!

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    1. I convert Canadian dollars to U.S. dollars using Norbert's Gambit. My typical cost is about 0.1%. Even InvestorLine's fee on similar size exchanges is about 1%, which beats the 2.5% fee on most credit cards.

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  5. I buy USD in BMO acct using Norberts Gambit when the rate is fovourable and keep it in BMO where I can e-tranfer free to BMO Harris as needed. When we are south I compare the current rate to the rate I paid thru BMO. If it is in my favour, I use Brim no fee card with no foreign exchange fees. Brim also gives cash back and I see the exchange rate at point of sale so know there are no extra fees.

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  6. Does it make sense to consider opening a US Bank account? I have one since we lived in the US for a few years and I keep the account and associated credit cards. Downside is I"m not making any interest on the account, but maybe there are better options. I'll check into it after reading this article.

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    1. Hi Joel,

      I'm currently getting 1% on a U.S. dollar bank account at EQ Bank.

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