Understanding Currency Conversion For Travel Payments.

When traveling abroad, many merchants will ask you if you’d like to pay in your home currency. Be sure to always choose the local currency so you can benefit from your card issuer’s negotiated exchange rate.

Otherwise, you could be charged a Dynamic Currency Conversion fee (usually an unfavorable one). Learn how to avoid these fees so you can travel more smartly.

Credit Cards

When you use your credit card to make a purchase abroad, the merchant may ask you whether you want to be charged in local currency or USD. Many travelers are tempted to choose USD, because they think they’ll avoid foreign transaction fees and get the benefit of a better exchange rate. But, in reality, choosing to pay in USD will often come with a hidden cost known as dynamic currency conversion (DCC).

The DCC fee isn’t listed separately on your receipt, but it’s usually somewhere between 1% and 3% of the total amount of your purchase. It’s typically charged by the payment processor (which is different than your card network). When you choose to pay in USD, the DCC fee is added on top of any other foreign transaction fees that might apply.

Most major card networks, like Visa and Mastercard, set their own currency exchange rates and publish them on their websites. When you make a purchase in a foreign currency with your credit card, your card network uses these rates to calculate the USD amount of your transaction. The card networks then pass these rates on to the merchants who use their terminals, so they can bill you in USD. If you choose to pay in local currency instead, the card networks generally charge the merchant a small transaction fee to cover their costs.

Some card issuers have rules that require their partners, including merchants who accept DCC payments, to disclose the fee they charge for currency conversion in a transparent way. This rule applies to a number of payment methods, including card-based transactions at ATMs and point-of-sale terminals, and online purchases made overseas.

The best way to avoid paying unnecessary currency conversion fees is to always pay in the local currency when you can. If you’re not comfortable doing that, then be sure to look for a credit card with no foreign transaction fees. There are a variety of cards with this feature, from travel rewards cards to co-branded airline and hotel credit cards. In addition, there are several services that offer prepaid cards with no foreign transaction fees.

Bank Accounts

When you travel internationally, you can avoid currency conversion fees by paying with a credit card. When using a credit card, you get the best exchange rate (the daily Mastercard, Visa or American Express rate) and earn rewards points on top of that. However, you should still keep in mind that some cards charge foreign transaction fees, which can add up over a trip.

If you prefer not to use a credit card, you can also order currency ahead of time from your bank. While this method can help you save money, it is not as fast as going to an airport kiosk or currency exchange counter. In addition, some banks may charge service fees and margins on the currency rates they offer.

It's also a good idea to carry some local currency in case you need to take an airport taxi into town, book a guesthouse or buy food at a market. If you're planning to do this, be sure to let your bank know that you are traveling abroad so they don't flag the purchase as fraud and prevent you from using your card.

You should also keep in mind that some currencies have higher interest rates than others. This can make the local currency worth more or less than the US dollar when it's being exchanged. Knowing when the best time to exchange is based on interest rates can help you maximize your value.

Often, merchants will ask you on the point-of-sale or ATM machine whether you want to pay in your home currency or the local one. This is called dynamic currency conversion, and it can cost you a lot in both exchange rate markups and foreign transaction fees.

If you choose to pay in your home currency, the currency will be converted by Mastercard's payment processor at that moment and billed to your account. The rate is subject to change, and the final amount will be based on the date of your payment and the exchange rate in effect at the time of authorization. If you choose to pay in the local currency, the final amount is based on the rate at the time of your payment and the fee your bank charges for international transactions.

Exchange Rates

If you’re traveling internationally, you need to know how your credit card is charged for purchases in foreign currency. Whether you’re buying paella at a restaurant in Spain or a wool blanket in New Zealand, your transaction is processed using an exchange rate that’s determined by the marketplace. While the exact exchange rate can change for a number of reasons, it’s best to understand how exchange rates are processed and how choosing to pay in local currency can save you fees.

When you use a credit card abroad, the credit card network (Visa or Mastercard, for example) determines the transaction’s exchange rate by analyzing customary market sources. The transaction is then charged in USD based on this exchange rate. Credit cards may also charge a fee to process the foreign transaction, known as a foreign transaction or FX fee. This fee is typically split between the card network and the card issuer, which is your bank.

Many merchants at your travel destination offer to charge you in your home currency rather than the local one, a service known as dynamic currency conversion. It’s a tempting option because it can avoid both the currency conversion fee and your credit card’s foreign transaction fee. But beware: This service often comes at a high cost, in the form of less favorable exchange rates and additional fees.

In addition to these hidden charges, you’ll likely be paying a currency conversion rate that’s higher than the current market rate. If you’re a frequent traveler, consider ordering foreign currency from your bank before your trip to get the best exchange rate. Many banks offer the ability to order cash online or through an app, which can arrive at your home bank within three to five business days. It’s a good idea to bring this money on your trip for emergency situations in which the merchant doesn’t accept credit cards or you have an unforeseen expense that requires immediate funds.

Dynamic Currency Conversion

Whenever you use a credit card in a foreign country, your bank will ultimately convert that charge into USD for the final bill, even if you didn’t choose to pay with DCC. That’s why it’s important to understand the dynamics of DCC and how it can negatively impact your travel budget.

The DCC (also called “cardholder preferred currency” or CPC) process offers merchants the ability to let customers pay in their home currency rather than the local one at the point of sale. This service is typically offered by the merchant, through a third-party DCC operator, and is not managed by a credit card company. While the apparent transparency and convenience of DCC is appealing to travelers, it often comes at a high price. For one, the exchange rate is almost always less favorable than a regular transaction would be. DCC also typically includes markups and fees for the merchant and/or the service provider.

What’s more, when a DCC transaction is processed, the exact amount of the charge won’t be revealed to the customer until they review their online statement or receive their credit card bill in the mail. That can create a potential for sticker shock and leads to both legitimate and fraudulent chargebacks, which are an added hassle and expense for both parties involved.

To make the best decision about DCC, check whether your credit card charges a foreign transaction fee and what that amount is. Then, look for a card that doesn’t charge for foreign transactions and decline DCC when it is offered. That will help to eliminate unnecessary costs and save you money.

While it’s true that many travellers will use DCC when given the option at a point of sale, it’s possible to avoid it altogether by simply choosing to pay in the local currency. While this may not be convenient for everyone, the extra step of choosing to pay in the local currency can often result in a better overall exchange rate than DCC and avoid any fees or markups that might be applied by either the merchant or service providers.

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Mark Fravel

Mark Fravel is the owner/operator of National Transaction Corporation, a payment processing company uniquely focused on the challenges of payment processing for the travel industry.

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