The Best Way to Carry and Exchange Money- The Ultimate Answer

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Regularly I come across people asking me what the best way is to carry money and exchange it into local currency. Cash, ATMs, credit cards, traveller cheques, bars of gold… which is cheaper and which is safer?

This is the definitive answer, which I shall provide in a short version, for those who like to get to the point, and a long version, for those skeptics who think they’re smarter than everybody else. This advice is focused on Europe but i really applies to most countries these days-barring perhaps some oddities like North Korea and Trans-Dnistria.

*THE SHORT VERSION.*
In 99% of cases the cheapest and safest way to get local currency is using ATMs with a debit card issued by your local bank. Period. A credit card is complementary and reduces the amount of cash needed.

- It’s smart to bring at least 2 debit cards (and if there’s 2 of you, at least each of you should have one) in case one breaks or gets eaten.
- If you don’t travel much, inform your bank (so they don’t block your card due to ‘suspicious activity’).
- Withdraw large amounts e.g. €400 to minimize transaction fees.
- Check your monthly withdrawal limit. Some banks will only let you withdraw €500 overseas a month. If that is the case, ask for an increase.
- Bring some cash for emergencies- if your home currency is freely convertible (USD, AUD, GBP) bring some of that- US$200 or equivalent will do.
- Use a credit card where possible for large expenses (hotels, train tickets, fancy meals, etc).
- Don’t bring traveller cheques. Nobody wants them.
- There are ATMs at every major international arrival point, air port, train station, etc, as well is in some of the smallest villages all over Europe.

*THE LONG VERSION- because you’re skeptical*
Now, are you thinking ‘but I always heard there are ridiculous foreign exchange fees attached to foreign ATM and credit card use?’ In that case, please read on.

Most people have only a hazy idea of foreign transaction fees. They see signs at exchange bureaus exclaiming ‘no commission!’ and they think that’s a bargain. It’s not.

There are two kinds of fees:
- +One-off transaction fees,+ e,g, your home bank charges $5 per overseas ATM withdrawal or a fixed fee, like €7 per transaction, when exchanging cash.
- +The fee built into the exchange rate.+ When you check the newspaper, or a site like http://www.oanda.com, you see the +Interbank+ rate. Remember this: you will NEVER pay the interbank rate. Banks use a different rate and this is how they make money.

When an exchange bureau says ‘no commission’ they refer to the one-off fees. They of course still need to make money so they use an exchange rate that is less favourable.

+Let’s look at an example:+
Let’s say the interbank rate of the RoughGuide dollar (RG$) to the € is 1.50, meaning to get €100 you need to pay (in theory) RG$150. I say in theory because you will never get the 1.50 exchange rate.

A +debit card ATM transaction+ will typically incur an exchange rate fee of about 2%, meaning to get €100 you have to pay RG$153

Most +credit card+ fees are similar, or perhaps 3%, meaning you have to pay $154.50

But a typical +bank or exchange bureau+ will charge at 5-10% for cash- meaning you pay between RG$157.50 and RG$165. If you buy Euros at a typical bank in the US, 10% seems fairly normal- RG$165. (Incidentally, if you want to sell € to them for RG$, they will use a rate below the interbank rate- meaning that for your €100 you will only get RG$140 or so. This is why you should avoid changing cash too many times)

So when exchanging cash, you end up losing RG$4.50 to RG$12 per €100 versus the debit card+ATM… suddenly the ATM rate doesn’t look so bad anymore, does it?

Even when your bank charges you a few RG$ per overseas withdrawal, it’s still cheaper to use an ATM, provided you withdraw a relative large amount (say, €400 at a time)

Note that the exchange rate % and one-off withdrawal fees are set by your home bank. ATMs in Europe rarely charge for withdrawals. (I have seen it in the UK but nowhere else). If you travel often, it pays to shop around for a bank that has low fees (in the US, Credit Unions are often a good bet). If you travel only once a year, it’s probably not worth changing banks over this.

What about +pre-paid cards?+ Caveat emptor. I see no benefit in using these. You load a card with Euros, before you depart. That means you lock in the exchange rate. More on that below.

Pre-paid cards often use a rate that is less advantageous than ATM withdrawals with a debit card. So you are losing money right there. And they often come with a host of (hidden) fees: top-up fees, administrative fees, and if you have less than €50 left you may not be able to withdraw it… so again, typically pre-paid cards are more expensive. They are often being flogged by banks to inexperienced first-time travellers- no experienced traveller I know uses them.

+Traveler’s checks?+ Apart from the fact that the rates (and the fees) are, again, less good than ATM with debit card, you will also be spending lots of time trying to find anybody who actually will exchange them for you. They are sooooo 20th century, dude.

Contemplating +buying in advance to lock in the rate?+ Either using a pre-paid card, or exchanging cash at home? This may be a good thing, if the rate goes up. Or it may be a bad thing, if the rate goes down. Your chances are 50-50.
But keep in mind that if anybody could accurately predict exchange rates, they would not be on this board asking questions, but they would now be retired on a private island with an oversized yacht somewhere in the Caribbean. Nobody knows which way the rate will move.
On top of that, most methods of locking in the rate require you to buy those € at a rate that is less favourable than if you were to use ATMs with a debit card. So you need to make up for that cost differential as well. So your chances are more like 40-60. By which I mean 40% chance you gain and 60% chance you lose. The odds are stacked against you, my friend.

Finally, when using a credit card overseas a kind salesperson (or even an ATM) may offer you to +complete the transaction in your home currency,+ ‘for your convenience’. What they are really asking is ‘Can I charge you extra because you’re a gullible foreigner?’
If you accept, they will use a rate which invariably is less favourable than the one you get from your own bank. It’s another money making scheme that hotels etc have discovered to squeeze a few more extra € out of their guests. Tell them to stuff it, and insist on having the transaction done in the local currency.

I realize this is a long post, but I wanted to be comprehensive. Hey, you could have stopped reading after the short version!

Do let me know if I have forgotten something. Otherwise: happy travels!

MTL 10/07/13    MoneyAsiaCanadaEuropeSoutheast AsiaUSA Link Report

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Excellent advice MTL, I always use ATMs with a credit card (rarely used) as emergency backup.

Michael Huxley 18/07/13    Link Report

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