When paying by credit card in a foreign country, you often will be given the option of making the charge in the local currency or having the charge calculated in U.S. dollars. Making the correct choice will save a lot.
Quick tip: For the majority of international travelers, the best option is to choose to pay in the local currency and to use a credit card that charges no foreign transaction fees.
Here’s why – and how to save on every purchase on your vacation or business trip.
How to get the best exchange rate
Making a credit card currency conversion choice is similar to choosing a bureau de change to swap your dollars for the local currency when you arrive in a new country.
At face value, paying in U.S. dollars may appear to be the more convenient option since it is nice to know the exact amount you’re spending and what you’ll be paying when your bill arrives. Unfortunately, selecting this option means you will likely be paying an added service fee and getting a poor exchange rate compared to the exchange rate offered by your credit card issuer.
Think of charging in U.S. dollars like exchanging your money in the airport – you’re paying extra for convenience, and most likely getting less for more.
There is a better and cheaper way.
How currency exchanges are calculated
To understand why being charged in the local currency is the better option, it helps to know what happens when you make a charge in a foreign currency. That pending charge goes through a currency conversion process that translates your spending to the equivalent in U.S. dollars before it appears on your monthly credit card statement.
The underlying question that determines how you’ll get the best deal is: Who is actually deciding which exchange rate you’re going to get?
When you make a credit card transaction abroad and choose to be charged in the local currency, you are essentially opting to allow your card-issuing bank to conduct your conversion. Currency exchange processes vary bank to bank, but essentially banks work to get you the best exchange rate for that currency for that day.
If you choose to make the charge in U.S. dollars or your home currency when offered at the time of purchase, you’re opting to allow an outside, third-party service to calculate the exchange upfront. When the pending charge is passed on to your bank, you will be charged for that predetermined dollar amount.
Whenever possible with currency, it pays to avoid the middleman.
Don’t pack cards that charge foreign transaction fees
While it seems obvious that selecting the local currency transaction is the wiser financial choice, there is still one additional factor to take into consideration: Does your credit card charge a foreign transaction fee?
Many travel rewards credit cards offer “no foreign transaction fees” as a cardholder benefit, and these cards save you up to 3 percent per purchase when traveling outside the U.S. or making a purchase from a company located abroad. If you packed only cards that charge foreign transaction fees, this will add up (restaurants, shops, taxis, shows) on your vacation or business trip.
In fact, cards with foreign transaction fees put you in a lose-lose currency conversion situation. You’ll either be paying the extra transaction fee when you pay in the local currency or the third-party exchange rate if you choose to pay in U.S. dollars. Neither of these alternatives is good for your budget.
Your best option: Leave your foreign transaction fee cards at home or apply for a no-foreign-transaction-fee card before you travel. That 3 percent extra on everything can add up quickly and negate the value of any points or cash back you’re earning for using the card for purchases.
Local currency or USD: It’s your choice
One additional thing to note is that in most cases you decide how your currency is converted.
I’ve been in many situations – most often in places where there is a language barrier – in which cashiers and hotel receptionists think they are being helpful by picking the currency for me and presenting my charge in U.S. dollars.
Know that you don’t have to choose USD, and if a cashier is trying to charge you in a currency other than the local currency where you are making your purchase, you can ask for it to be switched.
While a one-off currency conversion fee won’t break your vacation piggy bank or business travel expense account, making the right choice could save you several hundred dollars over the course of a trip abroad.
See related: Traveling abroad? 9 ways to protect your cards, Cards and more to pack when you’re heading overseas, 2017 Card Fee Survey: Consumers catch a break