5 Tips for Exchanging Foreign Currency Abroad like a Travel Master

Exchange Currency Abroad

Exchanging foreign currency abroad can often be an intimidating topic for first-time global travelers. Rates can be confusing, there are often extra fees, and it is hard to be confident that you got a good deal. Every traveler has his or her preferences when it comes to exchanging currency abroad, here are a few tips (and stories) based on some of my personal experiences.

1 – What is the difference between a bank rate and a spot rate?

First, a little foreign exchange (or FX for short) 101. The first thing that will often trip up travelers is the actual rate that they are exchanging their currency. The value of most foreign currencies “float” based on a complex series of underlying factors like the economic output of the nation, it’s current political standing, or other governmental policies. While this isn’t true for every currency–many Caribbean islands, for example, have locked their currency to the US dollar–it predominantly is the case. And this means that rates will move around.

When you go to look up a currency on sites like XE.com or Google the rate that they give you will be the bank rate. Bank rates aren’t really for little people like you and me. They are the rates banks use when they exchange currencies in large volumes. This means that when you or I exchange our money, it will never beat the bank rate.

Instead, it will be at the spot rate, or rather the current rate being charged by the bank or institution. The spot rate will always be a few percentage points higher than the bank rate. This is fundamentally how the banks make money off exchanging currencies.

So our goal as savvy travelers is to get a spot rate as close to the bank rate as possible.

2 – How to get the best currency exchange rate

How do we get the best exchange rate? It’s all about where and how you perform your transactions. Here are a few do’s and don’ts.

Do use your credit card while traveling abroad.

Using your credit card while traveling is a great way to get an acceptable exchange rate on your purchases. Credit card companies make money off of their clients in two primary ways–a small percent of each transaction, and then interest fees if you don’t pay your balance in full. As credit cards became the preferred form of payment in more and more places of the world, credit card companies realized that making money off of foreign transactions wasn’t the best business model for them. Therefore, they provide a reasonable exchange rate, and many cards don’t charge foreign transaction fees.

Moreover, the rate you get when you use your credit card is the current exchange rate that is available. This means there is no foreign currency risk. In other words, the exchange rate will not go up or down, and you will be able to make your purchase decision with the best information available.

The one big caveat to using your credit card abroad is foreign transactions fees. If your card charges foreign transactions fees, leave it at home. There are many credit cards on the market today, all with different reward structures and bonus categories, that do not charge foreign transaction fees.

If you’re in the market for a credit card with out foreign transaction fees, NerdWallet has a good list of the best credit cards without a foreign transaction fee that is worth a look!

Do use an ATM while traveling to withdraw money.

While credit cards are great, sometimes you need hard cash. This is especially true in less developed areas, or countries where you expect to be tipping a lot. ATMs are a great way to get local currency while abroad. Similar to credit cards, ATMs will charge only slightly more than the current bank rate. In fact, these rates are set by the issuer of your debit card. This means that the small bank that you’ve never heard of isn’t going to have any influence over the rate you get.

What the bank that owns the ATM will have influence over, however, is the ATM fee. This is no different than what you would normally expect when you withdraw cash at home. Just keep in mind that ATM fees tend to be higher in locations where they have a captive audience. Examples of these locations would be casinos, boats, or resorts that cater to your entire vacation. This makes airports a good place to withdraw some cash right after you land.

Using an ATM abroad is fairly straight forward, and they almost always have an English option for you to select. The one thing you’ll want to know ahead of time is what the currency symbol looks like for the country you are visiting. Quite a few countries use the dollar symbol $ to denominate their currency. Don’t let this confuse you into thinking you are taking out US dollars.

I got tricked by this the first time I visited Mexico, who denominates their currency, the peso, the same way the US does. I foolishly saw the $ symbol at the ATM and took out $200. Surely that should be enough for tipping for my week at Excellence Playa Mujeres, a luxury all-inclusive resort. Imagine my surprise when $200 in pesos came out of the machine. This was the equivalent of about $20 USD, or enough to tip the driver after the 45-minute ride to the resort. Doh!

Don’t exchange money at the airport kiosks.

Seriously, these guys should be your last resort. They are in the business of making money off of you not knowing the best way to exchange money. They call it convenience, but the ATM right next to their kiosk is probably a faster option. You’ll pay a hefty fee for their services. The only scenario where I can see them as useful is if you mistakenly come home with a wad of cash that you’d like to exchange back into your home currency. If that’s the case, see tip five below!!

Don’t accept a price in your home currency.

Typically called dynamic currency conversion, this is the practice of a business giving you two prices–one in their currency, and one in yours. They know that currency is confusing for the uninitiated, so they are looking to take advantage of your (former) lack of knowledge. In economics, this is referred to as information asymmetry, and the party with less information is about to get a bad deal. Use your credit card, go to an ATM, or at the very least call them out on the terrible rate and try to negotiate them down.

The only exception to this rule is in countries where their currency is fixed to yours. I mentioned earlier that this often happens in Caribbean countries where the vast majority of their income is in the form of tourism. The Cayman Islands, for example, as their currency, the Cayman dollar, locked to the US dollar at a rate of USD/KYD 0.82, or one US dollar equals 0.82 Cayman dollars. In this case, merchants will be happy to give you a price in either currency, and the math tends to work out right.

3 – How to exchange foreign currency before your trip

Sometimes it makes sense to leave your home with some foreign cash stuffed in your pockets. Not only does this help you hit the ground running when you land, but depending on the country you’re visiting, it might be essential. Quite a few American travelers learned this lesson the hard way when they visited Cuba for the first time. Not only does the island nation not have much in the way of ATMs to withdraw cash from, but there also aren’t formal banking relationships established between the two countries. This means that American credit cards are close to useless.

There are quite a few countries throughout the world where some version of the same story is true. In these cases, it’s best to purchase foreign currency through your personal bank. Most banks will be happy to process the transaction for you, for a small fee. Fees can include a transaction fee that is a percent of the total value exchanged, as well as a fixed delivery fee to have the cash sent to the bank or your house.

If your personal bank has a relationship with a local bank in the country you are traveling to you may be able to visit a branch while abroad to withdraw cash.

4 – How to avoid foreign transaction fees while traveling abroad

Foreign transaction fees are one of the most common ways that travelers get burned when spending money abroad. It’s important to understand the fees associated with the different debit and credit cards that you hold. In today’s global world, it’s easier than ever to hold a card or account that doesn’t charge foreign transaction fees. If your card of choice charges one, consider looking into the many products designed for travel that don’t carry annual fees or foreign transaction fees. Many of the popular online banks have fee-free products geared towards travel.

Foreign transaction fees can pop up in other places while traveling, but sometimes it does make sense to pay them. A good example is when I was staying at the Park Hyatt in Tokyo. Needing to get some cash in the local currency, Yen, I asked the concierge where the closest ATM was. He told me there was one in the building next door, but they could also add a charge to our bill and dispense cash for me for a 5% fee.

Normally this would be a terrible deal, but it also meant that I could charge the currency to my credit card. The card I had on account there, the Chase Sapphire Reserve, earns 3 points for every dollar spent on travel. Each point earned on the card is worth about $0.02. That means that by spending at the hotel, I received a 6% return in the form of points. With the hotels 5% fee, it was almost like I was being paid 1% to exchange my cash there. I also knew that I was getting a good rate because the transaction was being processed on my Sapphire Reserve card.

All in all, it was a pretty good deal.

5 – What to do with foreign currency left over from your trip

Having cash in my pocket before I go home always leads to bad decisions. I get the urge to spend every last bit before boarding my last flight. But that doesn’t have to be the answer. Here are a few ways you can squeeze some extra value out of your last few Pesos:

Hit up the duty-free shop.

Okay, probably not the best option, but the duty-free shop can be a good place to burn a few bucks. Their prices aren’t usually that great, and you can often find better deals elsewhere in the airport. They are, however, a great spot to pick up that last souvenir.

Frame your excess currency.

This is one of my favorites. Framing your excess currency is a great way to tell your travel story. No matter if you only have a few random bills, or a collection from around the world, framing currency is a great way to start a conversation about your time abroad.

I like to use floating frames that are just two pieces of glass that sandwich the bills. These can be hard to find, so here are two that would work well: 10″ x 20″ Floating Frame for 3 or 4 bills & 8″ x 10″ Floating Frame for 1 or 2 bills

Save it for your buddies.

If you had a good time in the country you just visited, there is a good chance that someone in your network will travel there soon. That’s the power of word of mouth. Keep that currency on hand and offer to sell it to them before they leave. If you do, make sure to sell it to them at the bank rate. 🙂

Exchanging foreign currency when you get home.

If all else fails, exchange your excess currency back into your native denomination at the airport when you get home. You’ll pay a hefty fee for this, but if you don’t think you’ll ever use it, you might as well exchange it. Me personally, I’d rather just plan another trip.

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