Understanding Exchange Rates and Handling Foreign Currency

Understanding Exchange Rates and Handling Foreign Currency

July 2019

Understanding Exchange Rates and Handling Foreign Currency

While packing strategies are my most frequently asked question, the next most popular is how to handle foreign payments and currency when traveling abroad. Should I use cash or credit? Where should I get cash, and when, and how much is appropriate? What’s a fair exchange rate, and how does one even read the rate quotes? We’ll tackle these questions and more in the sections below. 

Exchange Rates

Let’s start with basic exchange rates. If you’re traveling to Europe from the United States you’ll be wanting to exchange some of your US Dollars for Euros. A simple browser search for “dollar to euro exchange rate” will provide you that official market exchange rate, which as of this writing looks like this: EUR/USD 1.13. The first currency in any quote is always the base or “1 of”, so to verbalize, this currency quote means you can exchange 1 Euro for 1.13 US dollars, or vice versa exchange your 1.13 US dollars for 1 Euro. In practical terms, this means for every 100 Euros you want, it will cost you 113 US dollars. You can replicate this for any currency. 

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Getting Cash: Cost vs. Convenience

The next step is actually exchanging or withdrawing cash, and here you have a few options. Many prefer the piece of mind of having physical currency prior to departure which means exchanging your home currency for foreign currency at your local bank or a currency exchange kiosk in a city or airport. This is where the cost considerations come in. Once at the bank or kiosk, notice the difference in their exchange rate vs. the official rate you researched in advance. Using our previous example, instead of EUR/USD 1.13, you might see a rate of 1.23, meaning the 100 Euros you want costs you 123 US Dollars instead of 113. The banks and kiosks profit from this differential in addition to any other fees tacked onto the transaction. And while this avenue may provide more convenience or peace of mind, the costs can add up quickly depending on your cash needs. You might enjoy this video 538 made that explores commissions and other cost drivers of currency exchange. 

Our preferred method is simple and minimizes costs: we solely use our debit card abroad at local ATMs. Though not universal, most major banks have a checking account option that allows for foreign debit withdrawals without fees, with an exchange rate close or equal to the market rate. And while using your debit card usually leaves you on the hook for local ATM fees, these are fixed and relatively marginal costs if you’re keeping your number of withdrawals to a minimum. Some banks like Charles Schwab offer unlimited international ATM fee rebates which is a great cost saving feature to consider. Another debit card advantage is greater flexibility to take cash out in increments, reducing the amount you carry and limiting your risk of large losses in the case of misplacement or theft. PRO TIP: don’t forget to inform the bank(s) of your debt and credit cards of your travel plans so they don’t freeze your accounts for suspicious/abnormal transactions.  

As always, use your best judgement for your unique travel plans. Perhaps you know you’ll have limited ATM access at the beginning of your trip, or the country you’re traveling to operates primarily on cash (such as our trip to Galapagos). Strategize the timeline of your cash needs and map out local ATMs in the towns and cities you’ll be staying. With proper planning you’ll have the cash you require, without incurring too many unnecessary costs.  

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Credit Cards

Paying with credit is typically the most efficient and stress free way to transact abroad. When possible, we try to do ALL of our transactions on credit, and here’s why: credit cards are easier to carry and handle than cash (and coins!) and reduce your risk for larger transactions, credit cards limit your liability in the case of fraudulent transactions, and credit cards companies typically transact at or close to the market exchange rate. In addition to the practical benefits, credit cards almost invariably offer rewards or cash back that reduce the all in cost of your trip.

The most important part of choosing your travel credit card is the foreign transaction fee. Make sure you choose a card with zero transaction fees, which will be standard for most “travel” cards. We’ve seen cards where the fees are 3% or even higher, which adds up very quickly on a vacation and should be avoided. Away from the foreign transaction fee, the best card will depend on your preferences of annual fees, bonus spending categories, and rewards/perks. We love our Chase Sapphire Reserve for its extra points on dining and travel expenditures, but any travel card will do. For help with choosing a travel card, Nerdwallet is our favorite resource for card info and comparisons.

I hope this helped answer your questions regarding exchange rates and foreign currency!

Read all blog posts for more travel tips and tricks!

 


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