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Conquer the currency conversion conundrum

By Eliott C. McLaughlin
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(CNN) -- Your plane landed at Barajas two hours ago. You've already picked up a rental car and checked into your hotel in downtown Madrid. But your meetings aren't until tomorrow, and you have some time to kill.

A jaunt down to the Plaza Mayor and a glass of Rioja might help you wind down.

But how will you pay? There are several options when making foreign transactions, and the experts concur: Use several of them.

"I'd definitely advise not going to Europe with (only) a single card," said Tim Jarrell, publisher of Fodor's Travel.

Credit cards, debit cards, cash and traveler's checks all have their advantages, he said, but "you're going to have to do your homework."

Banks and credit cards generally offer competitive exchange rates, but beware the additional fees, Jarrell said.

In addition to researching exchange rates so you don't get fleeced, you'll want to call your bank and credit card issuers. The benefits are twofold, Jarrell said.

First ask about any charges levied on foreign transactions. Second -- and this is especially true if you don't often leave the country on business -- let the companies know you're leaving the country so they don't flag your account and shut it down.

"You don't want to be chowing down on chicken Marsala in London and find out your bank doesn't think it's you," Jarrell said.

Credit cards

If you're looking for cheap transactions, certain credit cards are geared toward travelers. The fees that credit cards generally add to purchases abroad are often less than you'd pay to get cash at currency-exchange kiosks or hotels, which often have poor exchange rates or high commissions, said Fritz Elmendorf, vice president of the Consumer Bankers Association, a national trade group.

"You are getting the very best exchange rate when you use the credit card as opposed to cashing traveler's checks or cash," he said.

But don't slide your credit card into an ATM. Although it's nice to have the cash-advance option in an emergency, you could get hit with exorbitant transaction fees and surcharges -- and unlike regular purchases, cash advances command a steeper interest rate that begins accruing immediately, not after your next bill, Elmendorf said.

The general fee that credit cards charge for foreign transactions is 3 percent, Elmendorf said, but it varies depending on the card and customer.

Visa and Mastercard charge a 1 percent foreign transaction fee, American Express charges 2 percent, and the companies issuing the cards can add fees of their own.

According to a 2005 credit card survey by Consumer Action, a nonprofit organization focused on consumer education and advocacy, most issuers charge 2 to 3 percent, which includes the Visa or Mastercard charge. But some issuers are geared toward the world traveler -- not only do they forego the foreign-transaction fee, but they foot the credit card company's as well.

The survey listed Amalgamated Bank, BMW Bank, Capital One, Discover and Tompkins Trust as charging no fee for purchases made abroad.

Debit cards

But what if you need some cold, hard currency?

Tom Otley, editorial director for the London, England-based Business Traveller magazine, said when he's abroad, "I pay by credit card when available and go to the ATM as soon as I land."

ATMs are tops in terms of convenience, but they might not always bring you the best exchange rate, he said.

Some can slap you with numerous fees. Just like when you use an out-of-network ATM in your hometown, both the company that owns the ATM and your bank can add surcharges for using another machine, usually around $2 each. Plus, Jarrell said, banks sometimes add their own foreign-transaction and currency-conversion fees, sometimes up to 3 percent.

Again, do your homework, he said. Call your bank and find out what fees it charges for withdrawals abroad, and find out if it has a relationship with any banks in your destination country. A quick call could save you those surcharges, Jarrell said.


There is little benefit to using dollars abroad. If lost or stolen, they're gone for good. What's more, you could fall prey to dynamic currency conversion, when a merchant offers to convert the price of your purchase from the local currency into dollars.

It's billed as a service, Jarrell said, but "you get hit in ways you have no idea you're being hit."

You can get downright unfriendly exchange rates, and the merchant sometimes charges an additional fee for the "service."

"When in doubt, pay in the local currency," Jarrell said.

Don George, global travel editor of Lonely Planet Publications, said he likes to have some local currency in his pocket when he gets off the plane. It comes in handy for tips, snacks and taxis.

"You don't want to be in the vulnerable position of needing to exchange currency as soon as you arrive" jet-lagged and discombobulated, he said. "It's an optimum time to get ripped off."

Otley agreed, and said if you travel often, you should develop a relationship with a currency specialist that can provide you with currency at a decent rate before you leave and change it back to dollars when you return.

Failing that, there are several options for your leftover currency. Otley said he keeps his for his next trip. Several charities accept donations in foreign currencies. And George said he likes to spend it in airport gift shops or on departure taxes that certain countries charge to fly out of their airports.

"I would just buy something," George said. "I always use that money for the souvenirs, the Eiffel Tower keychain."

Traveler's checks

If you want your money secure, traveler's checks or travel debit cards are the way to go, but you're going to have to sacrifice convenience.

"You may pay some more in fees, but you get some extra security if you lose that card or those checks," Jarrell said, adding that you will be charged a set-up fee and transaction fees for that security.

However, lots of merchants abroad won't accept traveler's checks, or will charge hefty fees when they do, Elmendorf said.

"They just don't have the utility when you consider the alternatives," he said. "They made more sense when you didn't have such widespread acceptance of credit cards and widespread presence of ATMs."

Indeed, times have changed. Today, ATMs can be found in the most remote locations, even the tiny research enclave of McMurdo Station, Antarctica.

But whether you're heading to McMurdo, Monaco or Milan, the best option is to have several options. Get some local currency and traveler's checks for emergencies and incidentals, and keep a few low-fee credit and debit cards in your purse or wallet.

"You want to have multiple ways to access cash," Jarrell said.

This story first appeared on in July 2006.

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