¨Empty pockets never held anyone back. Only empty heads and empty hearts can do that.¨
Norman Vincent Peale
How to Get the Best Foreign Exchange Rates
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 transaction using the modified interbank rate.
Modified 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 bought a house in Mexico for 1,500,000 pesos, which at the time (November 2015) was equivalent to a bit over $86,000, according to oanda.com. I wired the $86,000 to the bank and went to close the deal and found that 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 ratei s charged 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.
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).
Which Foreign Currency Exchange Rate Do You Usually Pay
- 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 cards. You will not get the best rate usually in cash at a foreign exchange kiosk, hotel, or shop.
- More and more frequently, however, ATMs will give you an option that reads something like: ¨Do you want to accept or to decline the option that the bank makes a currency conversion (from the local currency back to your home currency) for you?¨. Decline this offer. The ATM will show you the withdrawal from your account in your home country’s currency. Unfortunately, if you do the math, you will usually find that the bank is charging you the dynamic exchange rate. (Eight percent less than the interbank rate). Ostensibly, this option seems like an excellent way to avoid a foreign exchange fee (more on this later). However, it is often just a way for the bank to take some of your hard-earned money away from you.
- Do not use any ATMs on the streets in Mexican resort cities or near European tourist sites that have signs that say you can withdraw US dollars. Typically, you will be charged 12-15% additional fees on these withdrawals. (Generally for safety reasons, it is best to use ATMs in a bank anyway). In Europe these ATM are associated with Euronet. Read here for more details.
Avoid Foreign Currency Transaction 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 either to: 1) 1-3% of the credit card transaction or the ATM withdrawal amount and/or 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 later in this course).
Once you have determined the fee, plan your withdrawals so that you minimize the fees. 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 at the time that you make your ATM withdrawals and credit card purchases, particularly in Europe. Usually in this case, the fee is three percent. You may want to consider these fees if your credit card or ATM card charges a foreign conversion fee. (As you will see later, there are many ways to avoid these foreign transaction fees).
Avoid ATM Foreign Transaction Fees
Sometimes you can even avoid ATM foreign exchange fees altogether by using a ATM at a bank that is associated with the network of your home bank. (For example, there are no fees for withdrawals at Barclays Bank in the United Kingdom if you have a Bank of America ATM). You can find out which overseas banks are associated with your bank by checking your home bank’s website.
In addition to the foreign exchange fee, you will often pay a fee for withdrawing money from the ATM in the country you are visiting. Usually, this fee is the equivalent in the local currency of around $2-4 per transaction. Some ATMs will charge more. The ATM will indicate the fee when you make the transaction.
It is not that easy to find bank accounts that do not charge a foreign exchange fee for ATM withdrawals. Schwab, and a few other financial institutions in the USA and Canada, offer accounts that rebate international ATM fees. Usually to be eligible for these accounts you must maintain a high account balance (usually around $25,000). When I tried to sign up for a Schwab account in 2013, they also required that I spend more than half the year in the US.
If you plan to do a lot of traveling, these bank accounts can be a godsend. Check out this post from the Points Guy for details. (Keep in mind, however, that you may still pay an ATM fee to the overseas bank).
While I am not sure if the option still exists, I have a Citibank account that waives ATM fees if I either maintain a $25,000 balance or pay a monthly $30 fee. I pay the monthly fee and estimate that it saves me between $50-150 in foreign exchange fees each month when I am traveling a lot. I signed up for this account after I receive a notice from my Citibank/American Airlines credit card. And, besides, I got 30,000 frequent flier miles for signing up for the account.
Avoid Credit Card Foreign Transaction Fees
Finding credit card companies that do not charge a foreign exchange fee is relatively easy. Many banks have credit cards available that waive foreign exchange fees. Besides, most credit cards that are associated with an airline or a hotel (i.e., Chase-United and Citibank-American Airlines cards in the USA) come without a foreign transaction fee.
It is generally not a good idea to make a withdrawal from an ATM with a credit card. Most credit card companies charge foreign exchange fees on these withdrawals and treat the withdrawal like a cash advance. Cash advances come with fees (up to 5%) and high-interest rates.
If the bank charges a hefty credit card transaction fee, try to minimize your use of the credit card by withdrawing money from your ATM card. Then, use that money for all but your most significant transactions