In today's world, people rarely carry large amounts of cash on them. People have credit cards for large purchases or even debit cards to access their checking accounts. ATM machines are on every urban street corner in America. But what happens when you're not at home in that urban setting? What do you do if you're on vacation?
I recently went to the Caribbean with my wife. We knew that most places would accept our cards but we questioned the exchange rate. Eastern Caribbean money isn't that strong in comparison to the U.S. dollar ($2.60 EC to $1 U.S.) and we knew that our credit cards would charge a service fee for purchases made in EC dollars. My wife, whom I consider a "world traveler," has always gone with the traveler's checks and prepaid card route. She would cash the checks in at the hotel and use prepaid cards so she wouldn't put her personal accounts at risk. I always used my credit card on vacation. Before our trip, I was sent to the bank to pick up a pair of prepaid cards and some traveler's checks.
The July issue of Money magazine has a great article regarding the best way to keep exchange costs to a minimum with today's weak dollar.
I found out she was completely wrong - a month too late.Money told us that the exchange rate on traveler's checks is 6% to 10% over wholesale; with up-front fees going as high as 1.5%. It turns out that with the advances in technology, more and more places are not even using traveler's checks. I confirmed this when the agent at my bank looked at me funny when I asked for them. He truly didn't know the process to get them for me.
Prepaid cards are just as bad, Money reported. The cards cost $5 to $15 to set up and the exchange rate is wholesale plus 2% to 7%. If a location doesn't accept them, worst case is you use the prepaid card at an ATM, where you'll pay additional fees.
Leaving the prepaid cards and traveler's checks at home, Money says the second-best way to get cash is at an ATM. Most users will face the wholesale rate plus a minimum 1% to 3% fee on top of the standard $1 to $5 withdrawal fee (unless you go to a casino, where I faced a ridiculous $10 fee). Make sure to use the ATM sparingly because of those withdrawal fees -- take out large denominations. Check to see if your bank provides services at your destination; you'll be paying little or no fees at all on those machines.
The best bet, to my wife's surprise, would be for travelers to use their credit or debit cards to make a purchase, according to Money. The typical cost would be the wholesale exchange rate, the best conversion available. Fees on average tend to be 3% or less. Discover, a unit of Morgan Stanley (NYSE: MS), as well as Capital One (NYSE: COF) cardholders get a special bonus: Both are free of exchange fees.
I'll just have to start planning another vacation to start saving on those fees.
Bring your debit card abroad, you'll save money
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Reader Comments (Page 1 of 1)
6-17-2007 @ 7:53PM
Interrobanger said...
Good to know. Debit cards are usually better on merchants as well, since the PIN systems have lower interchange rates than signature-based credit.
It's an issue I care about a lot, I work with a merchant group on industry practices. We've got a lot of examples of what Visa and Mastercard especially are up to at http://unfaircreditcardfees.com.
Incidentally, prepaid cards are easy on merchants, too. Pretty much anything but signature debit -- it's the fees on that (and the secrecy surrounding the banks' rules) that has got the credit card industry hauled before Congress three times this year already.
6-17-2007 @ 10:13PM
Keith said...
I think it's always best to be prepared. I went to Switzerland a few years ago and none of my credit cards or debit would work. I should have gone to the bank for traveler's checks before I left, but I forgot and ran out of time and thought I would be fine with my cards. I was there for a 14 hour layover, and I had no money on me. Luckily, I had about 10 euro in my backpack from a trip taken last year that I never took out so I was able to eat lunch and have something to drink. When I enquired at the bank at the airport why, the woman told me that they have a lot of problems with travelers like that all the time - networks are down, incompatible banks, etc. So I thought, I'll just wait until I get to Rome (my final destination) and try the ATM's there. Luckily I had friends meeting me at the airport, because once I arrived in Rome, I went to 12 different machines and none of them were working!! I always carry some cash in the currency of the country I'm going to before I leave just in case. I agree that traveler's checks are outmoded, and I never use them. I guess my 'moral' is to always cover your bases just in case and never rely on soley one method of payment. Better to be safe than sorry. I don't think the money you save on exchange rates is that 'huge' considering what most people spend to go on a vacation outside the US. There are better ways to save a buck, like prepaying for your hotel in your own currency when possible (don't forget travel insurance if that prepaid hotel stay is non-refundable).
6-18-2007 @ 8:08AM
Greg Rozelle said...
I found out that you need to tell the bank when you are outside your home country to use a debit card. Some banks block international transactions. If you travel from one country to another country. You will need to call them again, to tell them your in another country. Visa or MasterCard debit cards can work as a cash advance at banks. You will need your id and passport. Some banks don't realize the debit cards with the MasterCard or Visa symbol will work through the credit card cash advance system even through it still will come out of your checking account. This method you maybe charged a fee from your bank and the bank you use. At Atms outside of your home country, debit cards with a MasterCard or Visa symbol don't choose checking/current account. Choose Primary credit. It will still come out of your checking account.
If your debit card also have either the plus(Aka Visa plus) or Maestro it can work at a merchants that take those cards as a pin purchase and you can get cash back sometimes.
Smaller banks charge less foreign transaction fees the large banks.
6-27-2007 @ 12:24AM
Mindy said...
I think this info is out of date. More and more credit/debit cards are charging exchange fees when you use their card to make a purchase in a foreign currency. I am surprised that Money magazine didn't bring this up. Before you travel, check with the bank that granted your card, and find out their policy. If they do not charge an extra fee, then the ATM is the way to go.