It can be hard enough to save your pennies for that long-awaited adventure to foreign lands without losing a good chunk of it on exchange rates. Converting to the local currency without being on the losing end of the bargain takes advance planning and a basic understanding of how the currency exchange market works.
How Does Currency Get Bought and Sold?
Money is a commodity, just like underwear and bananas. It’s bought and sold in a global marketplace called Forex, which is why you’ll often see something called the “Forex rate” on exchanges. Banks buy and sell currency on Forex in the same way that shares are exchanged in the stock market. Traders buy at a lower rate than they sell, and the difference between the two rates is called the “exchange margin”. The wider the gap, the more money the bank or currency exchange provider makes.
The other way banks and currency exchangers turn a profit is to charge fees for every transaction. Whenever you buy currency, you’re charged a fee - and that fee is also imposed by your credit card company when they make the exchange to your home currency.
The best way to minimize the hit you take on exchanging currency is to watch both the exchange margin and the fee you’re charged on transactions.
Staying on Top of Exchange Rates
Don’t wait until you pack your bags to start looking at exchange rates. There are several online sites that tell you to the minute what your local currency is worth in whatever currency you need to buy. Values change every few minutes, but if you watch the Forex for a few days, you’ll get a sense of whether the currency you want is trending up or down. If it’s tanking, wait a few days. If it’s steadily climbing, buy what you need before it goes any higher.
Buy Only What You Need
Every time you exchange money, you’re charged a fee. That holds true when you sell as well as when you buy. If you exchange too much before leaving home and have to exchange it again when you return, you’ll be doubling your transactions and therefore doubling the amount you’ll pay in fees. If you have a bit left over at the end of your adventure, spend it locally. Bring home a few extra souvenirs or treat yourself to a great meal on your last night away.
On the other hand, you don’t want to take too little cash and end up relying on your credit card. You’ll be charged a fee for every transaction and some credit card companies really gouge their travelling customers. Same goes for ATMS that charge a fee to use them, a fee for the exchange, and a third fee from your bank for using someone else’s machine.
Stay Away from Airport Exchange Booths
While they may offer convenience, airport currency exchanges notoriously have the highest exchange margin and charge the steepest fees. Hotels also profit from ill-prepared travelers, and the rate of exchange at the front desk is rarely going to be favorable to their guests.
The bottom line is that you’re always going to lose money when you exchange currency, but you can certainly control just how much you’re giving away. Some credit card companies waive foreign exchange fees so it’s worth doing your homework if you’re a frequent traveller. Check the Forex rates online before heading for your bank or currency exchange vendor. If their exchange margin is above 2.5%, you can probably do better elsewhere. Finally, using a local ATM may prove to be the least expensive option because despite the multiple fees, their exchange rate is usually fixed at around 2.5-3%.
Remember the three golden rules: Think ahead. Exchange what you need. Spend it all.