When traveling abroad, you may need to exchange your currency in order to spend money in the country you're traveling to. However, the current exchange rates can impact the value of the currency you receive.
To maximize your travel budget, you need to find the best currency exchange rates. By using some of the below strategies, you can get the most out of your currency exchange while avoiding unnecessary fees.
Currency exchange 101
The currency exchange rate is a ratio between two currencies and tells you how much you can exchange for another. For example, the exchange rate between U.S. dollars and pound sterling may look like this:
$1:£0.79
This would mean for every U.S. dollar you exchange, you could get around 79 pence to spend if you take a trip to the U.K.
This affects your purchasing power while traveling abroad. In the above example, you would need to spend $100 to get just £79 — which would make it more expensive for Americans to travel to the U.K. than vice versa.
However, currency rates fluctuate day by day, so it's important to keep an eye on the exchange rate so you can swap currencies at the right time and from the right place.
Currencies fluctuate due to a variety of factors. The most commonly used system for currency exchange rates is the floating exchange system. This is determined by a country's current economic outlook, interest rates, inflation, and the cost of imports and exports.
Tips for finding favorable exchange rates
There are a few different ways you can exchange currency before you travel, including local banks, credit unions, major banks, or online currency converters.
Before you travel, it's worth looking into all the options below to see which is the best and cheapest way to pay with foreign currency.
Compare exchange rates
The first thing you can do is to simply compare exchange rates. Don't just pick the rate that your bank offers. Shop around and see if there are any better rates available.
You can try online currency converters, other banks, or credit unions to see which offers the best for your money.
Buy currency in advance
If you want to plan ahead and exchange money for physical cash, it's best to do this before you even arrive at the airport because fees are generally higher there.
In the weeks leading up to your travel date, compare exchange rates at your bank and other currency converters. By doing this in advance, you have more flexibility on when to exchange. That way, you won't be pressed for time and then forced to accept whatever the rate is on the day before you travel.
Buy currency at the ideal time
If you decide to exchange currency ahead of time, try to plan your exchange with currency trade fluctuations and market changes. While it may be a bit confusing trying to time the market, it can also help you avoid unnecessarily high costs.
Most trading happens when markets are open at the same time, making currency differences more volatile. Currencies are at their most stable when fewer markets are open, so you may wish to try and time your conversions with that.
However, as trading doesn't always occur during regular business hours due to time zone differences, this can be more difficult to work out.
Other options for paying with different currencies
Exchanging currency before you travel isn't the only way to pay with foreign money. You could also try these two methods:
1. Use a credit or debit card for purchases abroad
Another simple way to use foreign currency is to simply use your debit or credit card for purchases. However, you should check beforehand to see if your credit card charges foreign transaction fees. Some banks don't, but some still do and could charge between 1%-3% of the total transaction fee for every purchase.
2. Use your card to withdraw cash at your destination
You could also check to see if your bank has ATMs in your destination country to withdraw cash from there. This is often one of the more convenient options because you don't really need to plan ahead. Instead, you need to find an ATM. You will likely get a better rate if you use your own bank or a partner with your bank.
How to avoid unnecessary fees and costs
Currency transfers can change a lot, and sometimes it's sometimes hard to avoid overpaying when factors like the economy are the problem. However, with some smart planning, you can avoid high fees and bad rates.
Compare currency transfer methods
Before you leave the country, spend some time looking at the current foreign exchange rates to get an idea of how much each dollar will buy. Compare your bank to online foreign exchange services to see where the best rates are.
Also, compare different methods for foreign exchange, such as paying with a card in the local currency versus taking cash out and exchanging it beforehand.
Avoid transferring currency at the airport
One of the worst places to exchange money is at the airport when traveling to a new destination. Currency exchange kiosks often charge high fees and have the least favorable exchange rates.
Ideally, you should exchange your currency before you get to the airport or use another method of spending, such as a foreign debit card or a card you can use internationally. Just make sure to check with your bank to see if they have any foreign transfer fees.
Pay in the local currency
Another way to avoid overpaying when using foreign currency is to always make sure you pay in the local currency.
Retailers and restaurants will apply a foreign exchange rate if you pay in dollars — and this is rarely a good rate. This applies to both cash and credit card purchases. So, if you pay in dollars, you will have little to no knowledge of the exchange rate and could be in for a surprise when you check your balance later.
The power of using a prepaid card
Another alternative to exchanging currency is to use a prepaid debit card that you can use abroad. Netspend's prepaid debit card can be used internationally, so you can use it for purchases in the same way you would in the U.S.
The good thing about using a prepaid card is you can monitor your spending easily and stick to a strict budget if you prefer. Also, if your card is lost or stolen, you can immediately call customer service to get it deactivated. This makes it a better choice than to carry a lot of cash around with you.
Plan ahead for the best deals
The best way to get a great currency exchange rate and avoid paying higher fees is to plan ahead. Whether you prefer to pay in cash with money you exchange ahead of time or use your credit or debit card for purchases, it's best to look at all the options to find one that suits you.
If you do wish to use your card abroad, check the bank's exchange rates at the time of travel and whether they charge any additional fees for using it abroad.
