A quick primer on obtaining and using foreign currencies when traveling

As I mentioned about tracking expenses when traveling abroad, other countries don’t use US dollars. (I’m joking about this being notable, of course.)

But switching between currencies presents some extra challenges and requires extra awareness to prevent getting burned with fees. So if you’ve got international travel coming up, and especially if you haven’t done much of it, you’ll want to do a little bit of research beforehand. Start here.

Back in the day

I’m old enough to remember how foreign currencies “used” to work. You would do one of a few things:

• Purchase currency from a bank for the country you were about to visit
• Bring cash to an exchange desk (at the airport, say), and transfer money from one currency to another
• Buy travelers checks

None of these were great for the traveler. In the first two cases, the purchase “price” of the currency would almost always turn out to leave you with 10-20% less money from when you started. And in the case of travelers checks, you had to either find an office with which to cash them, or flummox the entire staff of the retail outlet as they tried to figure out how the hell to deal with it.

I’m very happy not to have to do any of these things anymore.

I never go to a new country with the currency of that country in hand. I get cash while I’m there. It’s usually one of the first things do when arriving at an airport.

Some would say that you don’t even ever need to hold the currency of the nation in your hand. You can just use a card for everything. And for the most part, that’s true. (Though try using a public restroom, which often requires small change.)

But is it that simple? Just use a card? Not always.

Which card? And how?

You have two main options on what kind of card to use, and two main ways to use them.

• Debit card. Your debit card, the one with the VISA logo on the front and some strange logos on the back that you’ve never heard of, can often be used in ATMs in foreign countries just like they are in the US. (You just need to match the strange logos on the back to the signs on the ATM.) Usually, you don’t even need to do anything special to have your debit card work. Debit cards can also be used to pay for things at the point of sale, bypassing hard currency altogether.
• Credit card. A credit card can be used to purchase things at the point of sale, and can even get currency out of an ATM. Again, usually nothing special needs to be done.

Two more notes here:

• It’s always a good idea to call your bank or other company to let them know that you’re going to be traveling. This way, they put a “travel notice” on your account, which prevents the fraud police from shutting down your account for “unexpected activity”.
• Though you can do it, never use a credit card at an ATM. You’ll incur cash advance fees that have no grace period, meaning you’ll get charged interest immediately, which is much worse than a normal purchase with its 30 day grace period.

Fees

First of all, you should be aware that these types of transactions aren’t usually fee-free.

A credit card transaction often incurs what’s known in the trade as a foreign transaction fee (or FTF), which is typically 3% of the purchase price. So if you buy something for the equivalent of $100, you’ll be charged a $3 fee.

Not all credit cards charge this fee, but for those cards, the annual fee you pay for the card is likely more than any money you save from the fee, so it may not be worth it.

A debit card isn’t fee-free either. Two of the major US banks, Chase and Bank of America, charge not only a 3% surcharge on ATM withdrawals, but also a $5 transaction fee. For point of sale purchases, it’s often about the same, minus the transaction fee.

It’s almost impossible to find a debit card without a foreign transaction fee of some kind. In general, you can find better deals with smaller banks. My little credit union, for example, charges 1% for both ATM withdrawals and for point of sale purchases. That’s fine by me.

So to get cash in a foreign country, I use my debit card, pay the 1% penalty, and am okay with it.

You can use the method of your choice, as always.

End of story? Of course not.

Secret sneaky fees

Your account, be it your checking account or your credit account, is tracked in your home currency. But when you go to an ATM in a foreign country (or purchase something directly), you’re purchasing it in a foreign currency.

So something needs to convert between one currency and the other.

This was the way that those currency exchange kiosks got you. They would buy your currency at a high rate, and sell you currency at a low rate of conversion. The spread between what the markets said and what they bought and sold was their profit. And it was a big spread.

But it’s easy to forget that even in the case of an ATM, the conversion still needs to happen.

That conversion is done by VISA or Mastercard. And interestingly, note that they have their own independent conversion rates; they aren’t the same!

Who knew there was a real difference between VISA and Mastercard?

I decided to do my own research, based on VISA and Mastercard‘s currency conversion tools. I put in the same date (6/23/2016) and converted from U.S. Dollars to Euros.

Mastercard said $1 would net me 0.876810 Euros. VISA said would give me 0.883626 Euros, which made VISA better by 0.8% in this case.

But this is only one case. A much more detailed analysis found that Mastercard on average charges 0.6% less than VISA.

How much does any of this matter?

If you’re going to be dealing in a foreign currency, you want to be aware of what your fees actually are. Call your bank, look it up, know them inside and out. This will help you as you make decisions on how to purchase things, as well as helping you keep better track of your purchases.

After all, you don’t want any surprises when you get home.