Exchanging currency: Watch out for surcharges!
Buying foreign currency involves a wide variety of fees and surcharges, whether you use plastic or trade your cash for another country’s cash.
The exchange rates you see in the Wall Street Journal or on the financial pages of major newspapers aren’t the ones you get. Indeed, it is difficult to know the precise costs of all your transactions until you receive your statements after your trip is over when it’s too late. It is possible to generalize broadly about one big thing though:
Surcharges on trading cash for cash are about twice those associated with using plastic, either as credit cards or prepaid foreign currency cards. Taking cash out of an ATM also costs less than trading cash at a kiosk, but somewhat more than using credit cards or prepaid foreign currency cards because both your bank and the foreign bank often — though not always — assess an extra flat fee of perhaps $2 or $3 for each transaction
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If you want to be wiser about how you manage money for overseas travel, it helps to do a little research before you leave home. Mostly, that research involves calling your bank or the issuers of your credit cards to ask what fees they assess when you use their plastic to convert money. But, before you make any calls, read on.
Credit purchases
The exchange rates you see in newspapers are the wholesale interbank rates, meaning the rates used by big banks to exchange massive amounts of money. Even the global mega foreign exchange specialist Travelex does not get those rates.
American Express says it relies on the interbank rate as its base exchange rate, then assesses its cardholders an additional 2% of the amount charged on consumer credit cards and 2.5% on corporate credit cards.
MasterCard and Visa, the national branding organizations for your bank-issued credit cards, set their base rates using proprietary formulas that they describe as based on “wholesale” rates. They then charge their issuing banks an added 1% exchange fee. Some issuing banks add up to another 2% to the cost of money and pass the entire 3% on to customers. A few don’t add a fee or even pass on the 1% exchange fee.
Bank add-ons apply whether you use a bank card to make a purchase on credit or obtain cash at a foreign ATM, except that ATM usage usually brings on additional fees, as mentioned above.
American Express, with a 2% surcharge, looks like a better deal than MasterCard and Visa where a full 3% is added on, but this is not a certainty. Michael Thiel, CEO and editor in chief of Hideaways International, which caters to upscale travelers, says he has experimented by putting charges on his Amex, MasterCard and Visa cards on the same day to see which cost most. He found that “Amex seems to give you a poorer basic exchange rate, [so the cards] all seem to come out pretty nearly the same.” Of course, the deal is better if your MasterCard or Visa issuer does not assess a full 3% on the cost of money.
If you want to know more about your bank card or your MasterCard and Visa credit cards, you have to ask the card issuers to reveal their fees. Information on some bank-issued cards appears in the currency chart found at http://www.bankrate.com/brm/news/cc/20050624b1.asp.
Plastic cash
North Americans are newly able to carry foreign currency on a plastic card, something the British and Australians have already been doing for awhile. Travelex and MasterCard rolled out North America’s first prepaid foreign currency card in early 2008 for sale beginning in the second quarter. In its first iteration, the card, called the Cash Passport, is available in euros and British pounds.
Travelex sets a base exchange rate for the card at four points above the wholesale interbank rates. The total add-on for the foreign currency cards is 4.5% to 5.5% depending on the markup (0.5% to 1.5%) applied by the bank or travel agency where you buy the card. The resulting exchange rates are comparable to those you experience when making purchases abroad using credit cards and considerably less expensive than buying cash at a kiosk in the U.S. or overseas. Christopher Russell, Travelex’s executive vice president of outsourcing, Americas, said the prepaid card is the least expensive way to exchange dollars for cash and least expensive way to carry money in a noncash form.
The other noncash form is travelers checks which incur at least the same costs as you pay when trading cash for cash. Indeed, there may be still-steeper fees at redemption after you may also have paid a percentage fee at the time of purchase.
The prepaid card is less costly than options involving paper largely because, with plastic, the money is electronic. There are costs associated with shipping paper money and all those coins around.
The prepaid card can be applied to purchases where MasterCard is accepted. Holders also can convert electronic money to the paper kind at ATMs overseas although that often involves a fee of perhaps $2 or $3 assessed by the bank providing the cash.
Travelex has currency exchange outlets all over the world, but using them to change money is about twice as expensive as the prepaid card, Russell said. Also, Travelex kiosks — like other exchange sites — assess a flat-rate commission on top of the exchange rate, which is not the case with the new Travelex foreign currency card.
As for the relative value of prepaid cards and credit cards, the prepaid cards “can be less or more expensive because those rates [exchange rates applied by card issuers] vary so much, but we are in that ballpark,” Russell said.
Whether costs are comparable or not, prepaid cards and credit cards serve different purposes. One provides the cash you need but lets you avoid carrying it as big wads of bills, whereas the credit cards let you avoid carrying it in any form whatsoever.
The Bottom Line
• Whatever you do, it costs money to trade your currency for another country's currency.
• Converting cash to foreign cash — whether at a kiosk at home or overseas — is almost always the most expensive.
• Converting travelers checks is like converting cash but potentially more expensive if you have to pay for the travelers checks or if you redeem the checks with a merchant who adds his own surcharges.
• Using ATMs to get cash out of your bank account or off a credit card generally falls in the middle range when it comes to surcharges.
• The cost of plastic cash denominated in a foreign currency falls at the lower end, but it can be a bit higher than your credit cards depending on which cards you have.
• Credit cards are less expensive. Depending on circumstances, American Express could be at the lower end of the cost range. However, some MasterCard and Visa banks eliminate all surcharges for consumers, making those cards the least expensive.
