What currency do you pay with when traveling abroad?

I just returned from a week-long excursion to Vancouver Island in Canada.

I very much enjoy traveling to our health-care loving neighbor to the north, and not just because I have NEXUS (which can make the crossing much easier), but because it is a beautiful part of the world, especially the west coast, which is like Portland and Seattle only more epic.

But one aspect that this area of Canada shares with Portland is that it gets cold and wet as a matter of routine.

And so what does one do when in this situation? Head to a store and buy a bath bomb, of course. (Priorities, people.)

And while at the checkout counter, bath bomb in hand, I was asked a question by the payment machine itself: Pay in Canadian dollars, or pay in U.S. dollars?

It turns out that even the proprietor didn’t know what the best answer was.

Currency conversion

When you travel to a country that uses a different currency system, you obviously need to pay in that currency. (A good counterexample is the Euro, which at the time of writing has at least 20 countries that all use the same currency. So a transaction in Italy will be the same as in France.)

Your money comes from a bank in your home country in your native currency, so a conversion needs to take place. Where does the conversion happen?

It turns out that there are two places the conversion can happen:

1. By the merchant at the point of sale
2. By your account (bank / credit card company)

If you choose #1, this means that you pay in your home currency when you make the purchase. So if you’re from the U.S., you select the button that says “pay in USD”.

And this is the option that the proprietor said she had been steering her American patrons to. She said it was always better to pay in your home currency.

But that’s not true.

Conversion at the POS

You see, when you pay at the point of sale, you have to undergo what is known as Dynamic Currency Conversion (DCC). This is done by a third party service, not by the merchant.

Do you think DCC is free? Of course not. Who do you think pays for this service? Of course: you pay for it.

So if you buy something for 10 CAD, but you choose the USD option, DCC takes effect, which can charge you by taking a percentage cut.

Are you going to sit there and do the math? Of course not. And that, as they say, is “how they get you”.

The proprietor didn’t know about this. Most people don’t.

Conversion by the bank

If you pay in the local currency, your bank or credit card company will need to do the conversion.

You may or may not get charged for this. Many credit cards have “foreign transaction fees” (FTFs) which charge you when you purchase something in a different currency. The industry standard charge is 3%, though some cards charge more or less. (My credit union debit card charges me 1%.)

Some cards offer “no foreign transaction fees”, which means this fee is waived. So if you pay in the local currency, you will get charged nothing extra.

The proprietor thought that all cards had foreign transaction fees, which is why she always recommended option #1.

So what to do?

So based on the above, here’s what I suggest:

• If you have a card with no foreign transaction fees, pay with this card and choose the local currency.
• If you don’t have a card with no foreign transaction fees, pay with a card that has the lowest fees, and choose the local currency.

In other words, I’d always recommend choosing local currency.

Is it possible that the DCC might be less than the FTF? Yes. Is it possible that it could be more? Yes. Do you want to sit around and find out? No. It’s better to work with the known and predictable.

Is it worth getting a card with no foreign transaction fees just to save on this type of purchase? In general, no, because these cards almost always have annual fees that dwarf any potential savings.

A 3% difference isn’t all that much, and isn’t really worth worrying too much about unless you’re making big purchases. But if you can avoid getting charged, wouldn’t you want to? This logic doesn’t seem very fizzy to me.

But enough about me. How do you pay for purchases when going abroad?