When traveling out of the country one of the most important factors for many people after reserving the hotel, tours, and air travel arrangements is how to pay for goods and services once in the foreign country. Recently the choices available to accomplish this task has expanded rapidly.
Travelers can use credit cards, ATM cards, cash, debit cards, currency cards, foreign bank accounts or traveler’s checks (although these are now less common). In the following article we will give you a step by step explanation of the pros and cons of each payment method, how to check current rates and rate trends, how to minimize fees and commissions, exchange methods to avoid, and other helpful tips.
First Things First: Find Out Current Exchange Rates
This is the traveler’s first step in the process. One must find out the current interbank exchange rate (free of fees and commissions) between your home currency and the foreign currency before shopping around for the best deal. These are just 3 out of many good sites to use to accomplish this.
XE.com – One of the leading currency exchange sites on the web. The site offers a quick chart of the most common currency pairings with current rates, historical rates, and a chart feature to help see any historical trends. This site does try to tie in purely objective information with commercial advertisements and services so be careful where you click!
Yahoo! Finance Currency – A new section added to one of the premier finance web sites on the web. This section has user friendly features such as quick currency converter guides (with several common denomination calculations done in table form), charts, and converters.
Exchange-Rates – A site devoted to exchange rates and basic exchange information.
Any of these sites will do the trick. The single most important aspect to look for is simply what the current exchange rate is between your home currency and the foreign currency.
Especially for less familiar currencies it is also important to make sure you are interpreting the conversion correctly, and not reversing the quotes. For instance if it is quoted USD/EUR @ 1.4, this means for every 1 Euro you would get 1.4 US Dollars. And for every 1 USD you would get .714 Euros (the inverse of the exchange rate). Most people know the overall relationships of the most popular currencies but if you are traveling through multiple foreign countries and need to change from one foreign currency to another, this can get confusing.
After you determined the current exchange rate, one could look at a chart to see if there is any trend in place.
For instance take this chart I pulled for the USD/EUR relationship over the past 2 years from Yahoo! Finance:
One can clearly see the trend since March of 2009 of a weakening of the US Dollar through that period. This is evidenced by the Euro buying 1.25 Dollars in March, while currently (October 2009) 1.45 Dollars are needed to buy 1 Euro.
What do trends mean? Not too much. The average traveler shouldn’t really worry about this unless he or she has a STRONG feeling of a further weakening of their home currency before they actually travel. Then it could make sense to exchange currencies as soon as possible to avoid a further weakening of the buying power. For instance in the example above if a traveler was leaving for France in July but exchanged currencies in March they would have an extra 86 Euros for every $1,000 USD exchanged.
If you are planning to exchange a large amount of money (more than $2,500-$5,000 USD or so) it could be worth staggering your exchanges. This helps minimize the risk of loosing if your home currency were to weaken substantially (as in the above example). It employs the same concept as dollar cost averaging in stock investing.
Now that you have a good idea of what the rates are currently, how to interpret them, and where they have been, time to do some exchanging!
What Form or Payment Method is Best To Use?
Usually using an ATM or a credit card are your best bets for getting the cheapest rates. In fact either one of these methods should give you the same rate you researched earlier. There is normally no mark up or commission derived from within the rate.
However, using either the ATM or credit card will entail fees and possibly several of them. Credit cards do not charge an “enhanced exchanged rate” meaning the exchange rate quoted should be the interbank rate, however if you make a purchase in a foreign currency they will charge either a flat fee or a flat percentage of the purchase.
There really is no way to avoid this fee with most credit cards. Capital One however does offer a credit card with no currency conversion or transaction fees. If you travel often it might make sense to get a Capital One credit card even if it turns out to be nothing more than a travel credit card. As an aside (for high credit score customers) the company does offer one of the best cash back deals currently available (1% or 3% depending on the purchase; foreign or domestic).
ATMs will usually charge 2 fees. Usually your home back will charge a fee for the transaction and the foreign bank/institution will also charge a fee every time you make a withdrawal. Therefore it makes sense to make as few transactions as possible and take larger amounts of money each time (if you feel safe doing so).
Both the credit card and ATM card methods will usually save you 4-6% in total versus other methods.
Direct exchanges of home currency cash in the foreign country at airport, tourist areas, and the like should be avoided. Usually there is no “fee” per se, however in its place the exchange rate is reworked to build a commission within the rate for the establishment. These kiosks or stores offer the worst deals, so they are to be avoided. It is a much better idea to visit a bank in your home country first to at least give you a small amount of foreign cash to get through the airport and to your destination.
Traveler’s checks also are usually not a great alternative. It is becoming an antiquated form of payment and the final cost is also fairly high. The main advantage of these is security. If you lose a travelers’ check it can usually be replaced at little cost to you. However for this convenience they are more expensive.
A more recent variation on this theme is the travelers check card and Travelex. This is a better alterative to a traditional check, but still is among the most expensive methods. Exchange rates in and of themselves could be close to the same levels one would get with ATMs or credit cards, but there are more fees attached and they tend to be somewhat higher. Activation, recharge, and replacement fees are a few examples.
If you are traveling for an extended period of time or will need a large amount of money it could be worth the effort of opening a bank account at a foreign institution in their currency. This would minimize fees but it does create tax reporting issues for both the United States and the foreign country. This would not make sense for 95% of travelers, but if you see yourself visiting this country often in the future and want a permanent cash presence in that currency this could worthwhile.
Getting The Best Rate For Your Exchange
Regardless of which method you choose, the best way to get the best rate is to shop around (big surprise). Usually you should work with a bank that you have the bulk of your accounts with. Bigger banks are a great resource if you belong to one of them, as they should be able to help you exchange funds directly.
As stated before if you will be using credit cards your cheapest choice is Capital One, as they charge the straight favorable intebank rate on exchanges and do not charge any fees. This is a great deal!
As far as travelers checks and check cards make sure you get a fair comparison including all fees. Ask what fees come with the checks/cards including activation, recharging the card, use fees, transaction fees, etc.
Also of note, some countries like The Bahamas, Belize, and Bermuda have their currency pegged directly to the dollar. So there is no need to convert from the USD to their currency as it is worth the same. This would mean no exchange costs and no transaction fees to worry about.
If you take your time and follow these tips the exchange from your home currency to the foreign currency should prove stress free and relatively cheap. Also depending on the amount of funds you are converting you can minimize your risk of being subject to wild currency swings especially during these volatile times.