The Best Ways to Exchange Currency

Try as we might to be frugal while traveling, it’s still sometimes necessary to spend money at places like hotels, grocery stores, and restaurants.  Still, we don’t want to pay any additional fees to our bank for the privilege of spending our own money.

There’s a lot of bad advice out there about how to access your money while abroad.  Some of it’s simply out of date, and some of it is provided by someone with an ulterior motive (such as online money changers). As someone with no financial incentive to mislead you, here is the order in which you should try to exchange currency, from best to worst, and why.

Things You Should Do
  1. Try to use credit cards with no international transaction fees – The very best option for spending money abroad is to use a credit card which features no foreign transaction fees.  This means that the purchase price in the local currency is converted using the credit card company or bank’s own exchange rate (an exchange rate far better than that offered by a money changer on the street, called the interbank rate) and no fee whatsoever is applied to the purchase.  This is the absolute best rate you can get when spending foreign currency.
    You are also protected if someone steals your card, and most good credit card companies can arrange to get you a replacement anywhere in the world within days or even hours.
  2. It’s alright to take cash from the ATM, if it’s in sufficiently large amounts – Your next best bet is to take out a large amount of the local currency from an ATM.  In most places in the world, the ATMs are members of the Star or PLUS networks, which means your ATM card will work just as it does at home.
    Depending on the foreign bank, it may be necessary to have a four-digit (no more, no less) PIN number, so if you have a PIN with more (or fewer) digits, you may want to change it before leaving home.  Helpfully, most foreign ATMs also have an English-language option.
    Some banks, such as Charles Schwab, offer ATM cards which don’t assess a fee for any ATM worldwide, so they’re perfect for world travelers or retirees abroad.  Since you still get the interbank conversion rate, it’s just as good as paying directly with the card, and you have access to cash.
    If your bank is like mine, though, they will probably charge you a flat fee for the foreign withdrawal, but that’s better than a percentage fee.  My bank charges $5 per foreign ATM withdrawal.  The more cash you take out, the lower the percentage of your money that fee represents.  If you take out the equivalent of $500, then $5 is a 1% fee.
    I try not to carry much cash at all, but it’s unavoidable in some countries.  Whether it’s that they’re developing or simply mistrustful of credit cards, cash is king in some countries.
  3. If you must, use a credit card with international transaction charges – As a last resort, you can spend on a credit card with a foreign transaction fee.  You’ll be assessed a couple percent on whatever you by, but you’ll at least get the bank’s own exchange rate.  Try not to do this if you can avoid it, though.  At least by using the card, you have protection against fraudulent purchases.
Things That You Shouldn’t Do
  1. Don’t convert currency at a money changer – The rates offered by these “convenient” money change booths and shops are extortionate.  It’s often five to seven percent worse than getting the bank rate, and is usually far more expensive than spending on a credit card with international fees.
  2. Don’t take cash from the ATM in small amounts (if your bank has a foreign ATM fee)  – If your bank is like mine, and if you take out a small amount of cash, the fee can represent a huge amount of the amount withdrawn.  Take out $20, pay a $5 fee, and you’ve just paid a 25% bank fee.  Yikes.
  3. Don’t pay in US Dollars (or any other non-local currency) – If you find yourself in a particularly touristic place, the price may be advertised in US Dollars or Euros.  Never, ever, ever pay this way.  It’ll be described as a convenience to you, but the exchange rate will always work against you, often painfully so.  In many developing countries, there is a “gray market” exchange in currency that allows locals to exchange powerful currencies for the local currency at a much better rate than tourists have access to.  You’ll pay much more than by paying in the local currency.
    You may also be offered the option to pay in your home currency when paying with a credit card, either by the merchant, or as an option on the credit card machine.  This is the same deal, and you shouldn’t do it.  Pay in the local currency and let your bank sort it out.
  4. Don’t carry Traveler’s Checks – Not that there’s anything wrong with travelers checks per se, but they’re a monetary instrument whose time has passed.  Finding a merchant that accepts them is near-impossible, and when you convert them to local currency at an American Express office, you may or may not get the best rate.  It’s all downside and no upside.
  5. Don’t convert US Dollars to a foreign currency at your own bank – If you order foreign currency from your bank at home and bring it along, you are hit with a double whammy of fees.  You won’t get the interbank exchange rate (you’ll get something like the money changer rate abroad) and you’ll be charged a commission on top of it!  Don’t do it!
Do I Exchange Currency Before Going Abroad?

I have a lot of experience using my ATM card and credit cards abroad, so I no longer feel anxiety when I put the card into a foreign machine for the first time– but I used to!  I bring my current three favorite “no foreign fee” credit cards, my ATM card, and $20 USD.  When I land at the airport, if I absolutely must have cash, I go to the ATM and take out a large enough amount to minimize the fee.

I’ve never actually had to spend the US Dollars I bring with me as my emergency fallback, but it still gives me peace of mind to know that if I arrived and somehow all of my cards wouldn’t work, if I couldn’t get on the internet to get it straightened out, and if I was completely stuck, I could still convert the $20 and take a train or cab to my destination to work it out there.

One last important thing to remember is to call your banks and credit card companies to advise them of your travel plans! This is critically important.  You don’t want to be ten timezones away, unable to contact your bank, and all of your cards fail to work because your financial institution wasn’t expecting a charge from Montenegro.  It’s easy, it takes five minutes, and after advising the bank of my travel plans, I’ve never had a problem.  Just call the number on the bank of the card.

What about you?  How do you spend money when traveling?  Did I miss any options here, or did I malign one of your favorites?  Let me know!

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