One of the biggest concerns when going to a new country is having to use a different currency. Should you exchange cash, use your debit card, credit card, online transfer.. Needless to say, there are many options.
What method of converting your currency is dependent on several factors such as, which country you are in, the currency you must exchange for, and the fees charged by your financial institutions. I will go over the three main methods (Cash, card, online transfer) providing tips, associated fees, and when each method is best to use depending on the situation.
Table of Contents
Cash
Tip 1: Limit Airport withdrawals
When exchanging cash, first know that you'll likely be getting the least favourable rate when doing so in the airport. If you absolutely need to withdrawal crash when arriving in a new country, I recommend exchanging at the airport only enough to hold you over until getting to your hotel, hostel, Airbnb, etc.
Tip 2: Shop Around
The next piece of advice is to shop around. Do a google search for currency exchange shops near where you are staying and make sure to check out a few. Because FX fees are constantly changing throughout a day, you will often find slight differences in the rates offered by various currency exchanges. This difference will mostly likely be negligible depending on how much cash you are exchanging but still worth getting a few extra steps in.
For instance, when I was in Mexico, one exchange offered 19.45 MXN to 1 USD while another offered 19.55. The difference was only 0.5% which on the $300 USD I exchanged only saved me $1.5 (hardly worth the extra 5 minutes of walking in the Tulum heat) but if I were to exchange $10,000, I would've saved $50 which would have bought me another drink at the overpriced hotel bars on the strip.
Tip 3: Do your research
Some countries (mainly those facing political and economical instability) may even offer a completely different "unofficial" rate that really doesn't even make sense.
Take the case of Argentina, when inflation hit and citizens didn't want to deal with rapidly decreasing Argentine peso, they started moving their money into more stable currencies such as the US dollar or Euro. To combat this, the government put restrictions on converting the peso making it expensive to do so. In comes the "Blue" rate or "Market" rate, which is what the value of the currency is normally - without government intervention.
Without diving any deeper into Argentina's economics, I will just say that by using one of the official currency exchanges in Argentina at the beginning of May 2022, you would get roughly 105 ARS for 1 USD, whereas the "blue" rate would give you roughly 210 ARS to 1 USD.
I am not suggesting you look for these rates as in the case of Argentina, the "Blue" rate is found on the black market, I am simply saying that you should do your research to understand what is happening with the economy and conversion of your native currency.
Cash fees
The fees associated with cash conversion are a little more subtle. You don’t see a fee warning pop up on an ATM screen or as a separate line as with an online transfer. The cash fees are in the form of a spread.
At a currency exchange you will typically see a sign with the common currencies (USD, EUR, GBP, CAD, AUD, etc.) and beside each you may see a buy column and a sell column. These two prices will indicate what the exchange will buy that currency from with their local currency and what they will sell it to you for the local currency. The actual market exchange rate (or spot rate) is normally somewhere in the middle.
While walking around Lima, I stopped by a local currency exchange and noted the buy rate was xx soles for 1 USD while the sell rate was xx soles for 1 USD. The spot rate at the time was xx soles for 1 USD. That means they are charging you xx% to buy your USD and xx% to sell you USD. These percentages aren’t exact as they don’t update their rates as frequently as price fluctuates in the market but gives you an idea of the fees none the less.
Card
Tip 1: Find a card with no FX fees
If you are planning to travel internationally you should consider getting a debit or credit card with no foreign transaction fees.
Some people get too excited about their 2% cash back or 5x super duper travel points they get from using certain credit cards without realizing these perks are being completely offset by foreign exchange fees. When you make a foreign purchase with a card that is not free of FX fees you are typically paying a 2.5% fee on top of the exchange rate. This means on a $250 purchase, sure your 2% cash back brings you in $5 but that foreign currency purchase is costing you $6.25.. Good luck using those rewards to save for next years vacation.
There are credit cards with no annual fees or minimal requirements that may not offer great additional perks, but the no foreign transaction fee perk is typically enough in itself. In the past I’ve used the Scotiabank Passport card but am currently using the HomeTrust preferred visa. I recommend checking out Ratehub (Canada) or NerdWallet (USA) for a list of cards and to find one that best suits your needs.
Tip 2: Avoid cash advances
Regardless of whether you're travelling or not, credit card cash advances are a big no no. Even with the slight chance your credit card doesn't charge a large fee for a cash advance up front, unlike with other purchases where there is a 30-day grace period, a credit card cash advance starts accruing interest from the second the cash is withdrawn. I won't bother diving into figures but can't stress enough this should be avoided if possible.
Tip 3: Decline ATM's conversion rate
If using a card (debit or credit) to withdrawal foreign currency, you will almost always be prompted to either accept or decline a currency conversion rate. This rate is offered by the bank in which you are withdrawing from and will most likely be 2x - 5x the cost of your native bank. Rather than accepting the 7-10% (sometimes up to 15%) FX fee, decline instead. This will process the transaction in the local currency which will be converted by your bank instead (typically for a modest 2-3%). No, it will not cancel the transaction and no, the ATMs will not advise that you can do this.
Card fees
Fees associated to card purchases and withdrawals are pretty much covered above. If you are making a purchase on a no foreign transaction fee card, there will be no additional fee charged by your bank but if your card does not have this perk, you will be looking at paying an additional 2.5% on each purchase.
When withdrawing cash from an ATM you are now equipped to avoid paying their additional FX charges but there are still transaction fees associated with withdrawing from a foreign bank. First, because you aren’t a customer of the ATM’s bank, they will typically charge you between $5-$10 to withdraw from it (sorry, you can’t decline this one). On top of that, your bank may charge a fee for using an ATM that is not theirs AS WELL as a foreign ATM. You can sometimes avoid these fees if you have one of the more premium accounts. Determining whether it makes sense to upgrade your account to take advance of these perks I will leave up to you.
Online Transfer
This is a broad topic that I will dive deeper in another post but for the sake of comparison, we will assume I am referring to platforms such as Wise, Revolut, Remitly or Western Union.
Tip 1: Wire transfer replacement
When you're in your local country and need to send someone money you have the luxury of making instant transfers via e-transfer (Canada) or Venmo/Zelle (USA), however, when sending to someone in a foreign country and with an account in a different currency you're out of luck. Enter, companies like Wise, Revolut and N26.
These platforms normally sync directly to your bank account and will take the funds in your native currency, charge a small fee, and send to the receiver in another currency. It is like a wire transfer only the fees are much less. Typically, wire transfers can cost between $15-$30 + a fee for currency conversion whereas, these platforms will give you the market rate and only charge a nominal fee (sometimes just a few dollars).
Tip 2: A potential one stop shop
On top of sending funds in different currencies, some of these platforms act as actual bank accounts where you can hold multiple currencies and even issue debit and credit cards. If you're travelling around quite a bit you can move funds between different currencies, withdrawal from ATM in different countries and use the credit card (typically free of foreign transaction fees) to make purchases. Just make sure to do research as there is most likely fees involved in holding different currency accounts.
Tip 3: When all else fails
If you're stuck in a foreign country with no cash and for some reason your cards and not working, you can typically rely on there being a Western Union (WU) nearby. Like the others mentioned above, WU will link and pull funds from your bank account, charge a small fee, and convert it to the local currency.
These funds can be picked up one of their locations. Just make sure to do research as not all locations provide cash and are just used for performing digital transactions.
Online transfer fees
One of the main benefits of these platforms is the transparency. You typically don’t have to calculate the rate charged based on a spread or wait till transactions are posted to your account to see what FX was used. These services will tell you exactly what they are charging you and what rate you are getting.
Depending on the volume of currency you are dealing with they will typically always save you money by charging a flat fee compared to a percentage of withdrawals
Summary
- • Withdrawal the minimum amount of cash necessary to survive in the country and have as a safety net in case debit/credit cards do not work
- • Typically withdraw using the Stack card as there are no fees charged by them for the withdraw (other than the FX fee that they sadly added earlier this year)
- • Make every purchase possible on a no foreign transaction fee card (HomeTrust Visa). Sure, I only get 1% cash back but don't have to pay any fees.
- • If needed (very rarely), send transfers via Wise to those with accounts in other countries