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Getting the best exchange rate abroad

Summary

Credit and debit cards offer the best rates for purchases, but there are a few pitfalls to avoid

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You’re headed overseas for vacation, but you can’t tell what your best bet is when it comes to spending. Should you convert some cash at your bank or the airport, withdraw from an ATM once you get there, or try to stick mostly to credit?

To get the best currency exchange rate, swiping your credit or debit card for purchases when overseas is probably your best bet.

Regardless of your credit card issuer, credit card exchange rates are the same across the board because they’re determined by the major networks — Visa, MasterCard and American Express.

“A lot of people are suspicious about tricks and traps credit card companies set in our way, but when you’re talking about the best currency conversion rate, it’s without question credit and debit and the networks that set the rates,” says Joe Ridout, manager of consumer services at Consumer Action, a nonprofit advocacy group dedicated to consumer affairs.

When you swipe your card while abroad, your card’s network processes it using a rate that’s close to the current market rate and sends the final figure to your issuer, he explains. “It’s extremely close to what the true rate is. It’s far superior to what you’d get at a bank or a currency exchange shop or if you’re changing at the airport,” he says.

He says the card network rates are 5 to 10 percent better than those offered by financial institutions such as bank branches that convert currency. It’s an even bigger spread when comparing to exchange shops on the street or in the airport.

“If you do it through some money-changing kiosk, rates will be even worse than the banks,” warns Rick Ingersoll, founder of the blog Frugal Travel Guy. He’s a retired mortgage banker in South Carolina who has traveled to more than 70 countries and took an around-the-world trip with his wife. Each time he travels, he relies on his credit card.

On July 17, for example, according to the market rate on XE.com, $1 would get you \u20ac0.91. But if you were making the exchange at a Travelex airport kiosk, you’d only get \u20ac0.79. You’d also face a $9.95 fee if you were exchanging less than $600.

Visa’s exchange rate comes much closer to that listed on XE.com (you can check Visa’s exchange rates with this calculator and MasterCard rates with this one). A \u20ac100 meal would cost you $109.63 on your Visa, while the market would convert \u20ac100 into $108.48.

How credit card conversion rates are set

Ridout suggests that Visa and MasterCard are able to secure such competitive rates because they have lower overhead costs than, say, an exchange kiosk that has to be staffed. The networks are also converting currency in large volumes.

Cost of a meal in US$
(Based on July 17 rates)
  • Bank of America: $114.98
  • MasterCard: $111.83
  • Visa: $109.63
  • Market rate: $108.48 (according to XE.com)
How many euros will $1 buy me?
(Based on July 17 rates)
  • Bank of America: 0.8502
  • MasterCard: 0.8817
  • Visa: 0.9036
  • Travelex at JFK airport: 0.79 (+ $9.95 fee for exchanges of less than $600)
  • Market rate: 0.9151 (according to XE.com)

Visa and MasterCard say they give consumers “wholesale currency market” or “government mandated” rates that are set either the day before or on the day the transaction is processed. “Conversation rates are set daily, except weekends and select holidays, for the more than 160 currencies Visa supports,” spokeswoman Connie Kim said in an email.

MasterCard says it uses multiple market sources, including Bloomberg, Reuters and central banks, to set exchange rates. “These rates generally reflect either wholesale market rates or government mandated rates that are collected during the daily rate setting process,” spokeswoman Flor Estevez said in an emailed response to questions.

“The rate that MasterCard uses for a particular transaction is the rate MasterCard selects for the applicable currency on the day the transaction is processed by MasterCard, which may differ from that applicable to the date the transaction occurred or when it is posted to the cardholder’s account,” she explained.

Both Visa and MasterCard agree that consumers get the best value by swiping their cards while abroad. “MasterCard can trade currencies in the wholesale market,” Estevez explained. “Generally speaking, wholesale market rates ought to be more favorable than retail market rates.”

American Express says it doles out a fair market rate to its clients, too. “Unless a particular rate is required by law, we will choose a conversion rate that is acceptable to us for that date. The rate we use is no more than the highest official rate published by a government agency or the highest interbank rate we identify from customary banking sources on the conversion date or the prior business day,” spokeswoman Jane Di Leo said in an email.

“This rate may differ from rates that are in effect on the date of your charge. We will bill charges converted by establishments (such as airlines) at the rates they use,” she noted.

Pitfalls to avoid

To take advantage of the savings you get by using a credit card abroad, steer clear of these traps:

1. Dynamic currency conversion

When you’re making a purchase with your debit or credit card, and the terminal prompts you to choose between U.S. dollars and the local currency, don’t opt for the conversion, Ridout says.

This is called dynamic currency conversion. “You sometimes will be offered a prompt or a suggestion by the merchant to convert the purchase into dollars before you buy. You should never do that,” Ridout warns.

Choose the local currency and you’ll get your credit card’s rate, instead of the merchant’s rate, which is usually not as favorable.

2. Foreign transaction fees

Credit card currency conversion rates lose a lot of their luster if your card charges a foreign transaction fee. These fees typically range from 1 to 3 percent of the transaction amount. American Express, for example, sets the transaction fee at 2.7 per cent.

When you’re talking about the best currency conversion rate, it’s without question credit and debit.

— Joe Ridout
Consumer Action

But a growing number of issuers offer cards with no transaction fees. Chase says a majority of its credit cards don’t have foreign transaction fees, including its J.P. Morgan Select, Chase Sapphire Preferred, Marriott Rewards Premier, British Airways Visa Signature, Southwest Airlines Rapid Rewards Premier and United Mileage Plus cards.

All Discover and Capital One credit cards are free of foreign transaction fees, too. For a more complete listing of foreign transaction fees, see “More cards bid farewell to foreign transaction fees.”

3. ATM withdrawal fees

Ridout notes that using your debit card to withdraw cash overseas also offers exchange rates that are nearly on par with the market rate. Just make sure you aren’t getting hit with too many ATM withdrawal fees. These are usually a flat rate per withdrawal.

Some banks and credit unions will reimburse you up to a certain amount for any ATM fees you’re charged for, Ridout says. Others will waive fees if you use ATMs at affiliated banks, so ask about both options before you go.

Holly Johnson, a personal finance writer and founder of the blog Club Thrifty, goes abroad a few times a year and says she waits to get cash for small purchases until she arrives at her destination. Then, she uses a debit card that waives fees for using certain ATMs and she only withdraws enough to get her through the trip.

After that, she relies on a credit card that doesn’t charge foreign transaction fees. “It’s less of a hassle to use credit when you’re traveling abroad. Almost everywhere you go, they will take Visa, MasterCard or AmEx and you can avoid fees and the dreaded task of changing your money back when you get home,” Johnson says.

To be safe, bring two different cards from two different issuers in case one ends up with a fraud warning or a network issue.

4. Cash advance fees

Unless you have no other choice, avoid using your credit card for a cash advance overseas. While the exchange rate will be good, you’ll be hit with cash advance fees of 3 to 5 percent on most cards. Plus, interest will begin accruing immediately and the interest rate will be as much as 7 percent above your purchase APR.

See related:6 budget-blowing international travel mistakes to avoid, 5 places with the highest ATM fees

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Credit Card Rate Report Updated: August 14th, 2019
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17.50%
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17.63%
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