¨Empty pockets never held anyone back. Only empty heads and empty hearts can do that.¨
Norman Vincent Peale
Introduction: Foreign Currency Exchange Tips
At the beginning of my days as a full-time, Fifty-Plus Nomad, I did not care about travel-related money issues like currency exchange rates, ATM, and credit card fees. I thought they were a small tedious detail that
I did not merit much attention.
However, when I reviewed my spending patterns after my first year as a Fifty-Plus Nomad, I realized that I had spent almost $3,000 on foreign exchange, credit card, and ATM fees and decided to do something about it.
I have dedicated time and effort to learn all I could about these money-related issues in the eight years since. Along the way, I have made errors, but I have managed to reduce these fees by 90%. It has not been that hard, and it has saved me over $18,000.
I want my fellow Fifty-Plus Nomads to avoid my mistakes. So I have developed several posts to help Fifty-Plus Nomads avoid some common but easily avoidable travel-related money mistakes.
Tip #1: Avoid the Dynamic Conversion Rate
The secret to getting the best foreign exchange rate is to avoid transactions that use the ¨dynamic conversion¨ rate as often as possible. Instead, you will get the best foreign currency conversion rates by making transactions using the modified interbank rate.
Foreign Exchange kiosks and hotels almost always charge the dynamic conversion rate. The dynamic rate is also standard when you allow an ATM to do the exchange conversion. The dynamic conversion rate generally is 7 and 8 percent commission.
ATM withdrawals and credit card purchases overseas usually use the modified interbank rate to determine their foreign exchange rates. Therefore, if you want the best foreign exchange rates, use your ATM or credit card.
Modified Currency Exchange Interbank Rate
The interbank conversion rate is what financial organizations receive when they exchange foreign currencies. You can find the interbank rates in the currency converter section of oanda.com and xe.com.
The modified interbank rate is usually the interbank rate plus a 1-2% commission. The exchange rates for most credit card and ATM transactions are ¨modified interbank rate¨.
In my experience, there is no way a traveler can avoid this 1-2% commission. I thought that a significant transaction would avoid this fee. However, I was wrong. I paid 1,500,000 pesos for my Mexican house, equivalent to $86,000 using the interbank exchange rate. When I closed the deal, I still owed 15,000 pesos (1% of the purchase price, or nearly $860). Never again will I assume that I can avoid this 1-2% fee!
Dynamic Conversion Rate
The other ordinary exchange rate is a ¨dynamic conversion rate¨. The dynamic conversion rate occurs at exchange kiosks, hotels, or when you allow an ATM to do the exchange conversion. The dynamic conversion rate generally is 7 and 8 percent commission.
Even worse, some ATMs are absolute rip-offs. These machines charge a seven to fourteen percent commission. You will find these machines near tourist sites throughout Europe and in Mexican beach resorts. (The ATMs in Mexican beach resorts advertise that they disperse US dollars).
In some countries where the currency is weak against the US dollars, you may pay less than seven percent at a currency exchange kiosk or bank. Conversely, if the money is stronger than the US dollar, the dynamic conversion rate can be as much as 10% below the ¨interbank rate¨. (Such was the case in the Eurozone between 2005-2008).
Tip #2: Avoid Foreign Currency Exchange Fees on ATM and Credit Card Transactions
Many banks will charge a fee, which they call a foreign transaction fee, for international ATM or credit card transactions. This fee is often equivalent to 1) 1-3% of the credit card transaction or the ATM withdrawal amount and 2) a fee of $2-5 per transaction. (Some banks charge both).
You can find out these fees on most bank websites. You can also find these fees after you’ve made your first ATM withdrawal or credit card charge by comparing the interbank rate for the transaction with the amount of money withdrawn from your account. (There is a sample of this process).
Once you have determined the fee, plan your withdrawals so that you minimize the costs. In other words, if the bank charges a $5 fee for each ATM withdrawal, take out the most maximum withdrawals possible in one transaction so that you don’t have to pay $5 each for a bunch of small withdrawals.
Sometimes banks will disclose their foreign conversion fees when you make your ATM withdrawals, particularly in Europe. Usually, in this case, the fee is three percent. You may want to consider these fees if your ATM card charges a foreign conversion fee.
Want More International Foreign Currency Exchange Tips?
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