46

A recent question illustrated one of the potential pitfalls of pre-purchasing foreign currency. In short, the poster was unable to pick up currency they had ordered, and a currency purchase is not a refundable transaction as it is a fluctuating commodity.

However, someone went even further and suggested that pre-purchasing currency in advance of a trip is a foolish thing to do, the lack of potential to cancel/refund the transaction notwithstanding.

And the lesson is: don't purchase foreign currency, at least not as currency (vs gambling with it, which is another topic). There's absolutely no need to do so. This is 2019 and your ATM and credit cards work anywhere, and automatically convert currency at rates far below what any scammy currency changer will offer you.

(source, emphasis theirs)

This particular comment was upvoted a few times, so it would seem others would agree with that assessment.

However, while a card may certainly work abroad, I am uncertain if it would be financially advantageous to obtain foreign currency in this manner versus pre-purchasing. I am not an economist, but I would have thought market forces would tend to favour the purchaser when buying 'at home'; whereas abroad there is less element of choice and more lock-in.

I haven't been abroad in a while, but I seem to recall the following things working against using a card abroad as described:

  • poor conversion rates, or at least average at best
  • a percentage fee on the transaction/withdrawal on top of this
  • a flat 'foreign transaction' / 'foreign currency' fee
  • others, like withdrawal fees

Though perhaps things have changed or I have misunderstood.

Is it more economic to pre-purchase currency before travel, or use ATM cards / credit cards when abroad? There are a few factors at play, but assume other things to be equal- I budget to spend, say, €500 abroad and spend that amount locally and appropriately regardless of cash or card (ie no reconverting to home currency, credit cards not used to withdraw cash from ATMs etc).

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    @Kevin I had written a bit more in that section originally but deleted it as I am no economist! I mean that (in the UK at least) there are several providers of foreign currencies (banks, Post Office, dedicated currency converters, plus online options); whereas abroad regardless of which ATM you use and where you use your credit card your bank/card provider will still ultimately process the transaction and charge any fees etc associated with it. Does that make sense? I'd be happy to rephrase :) – bertieb Jul 11 at 0:49
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    @Kevin 10% may be common in the US, but on a quick comparison of UK providers, plenty are more like 1% away from the MasterCard rate (which apparently tends to be better than Visa's). You'll pay through the nose in an airport, but that's true of a lot of things you can buy in an airport. – IMSoP Jul 11 at 13:23
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    "This is 2019 and your ATM and credit cards work anywhere" This does not match my personal experiences. While credit cards do work in most places, there's always places that don't accept credit cards, biggest example I can think of being taxis, and there's places that have a minimum for credit card payment, which'll either force you to either spend money you otherwise weren't going to or run around searching for an ATM. – Ave Jul 11 at 13:32
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    You can save a couple of bucks by not taking a small amount of cash with you. What are those (small) savings worth against the chance of being stuck in a foreign country with no money and no ATM in sight? Been there, done that, ain't doing it again. – JRE Jul 12 at 12:18
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    I don't like questions where someone has no idea how something works, yet goes on at length to assume things. "This must surely be bad, since I don't know how it works"... is not logic. SE's credo is "work the problem/do the research until you get stuck, then show your work so far". And that is important because the situation varies by locality... 4 paragraphs of wild guesses does not satisfy that. – Harper - Reinstate Monica Jul 13 at 4:51

11 Answers 11

72

You don't need to be an economist to shop something. I just did some quoting of USD to EUR

  • The daily wholesale close: 1.1251

  • The daily rate from Visa: 1.121988

  • The quote from my brick and mortar bank: 1.1794

  • The quote from the Travelex to pick up at my local international airport: 1.2335

For starters, you don't get the wholesale price in a retail setting (this should be painfully obvious but I'm pointing it out anyway). The bank is better than the airport but both are slightly worse than Visa is quoting.

I have a checking account with a Visa debit card that refunds ATM fees and doesn't charge a foreign exchange fee but I wouldn't land in a foreign country without some local currency in my pocket, so I disagree with the comment that prompted this question. I would absolutely carry $500 worth of a local currency even though it will cost 4.9% more to order it from my bank than Visa is charging today. That's not a scam that my bank is running; it's a very valuable service and is less expensive than the currency exchange at the airport which is also not a scam. It's literally no different than a convenience store charging more for a soda than the market does than the wholesaler does.

But, I'd also carry my $0/0% foreign exchange fee debit card and a $0/0% foreign exchange fee credit card to handle general spending, and as that comment points out the Visa exchange rate is the best of the options available at retail in my quick search.

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    It depends where you are going, and where you are coming from. If you are flying to France from the US, it's probably worth having a €100 cash, but you can manage just fine with a credit card. If you are flying to Germany you need to make sure you can get actual folding cash pretty rapidly (you can't pay for a coffee in a cafe with a card around us). – Martin Bonner supports Monica Jul 11 at 8:38
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    @MartinBonner And if you're flying to most places in Africa you better have cash because there might not even be an ATM. – DRF Jul 11 at 10:16
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    I always forget which way around these rates are to be interpreted - but given these numbers, either Visa or your bank is giving you a better than wholesale rate. – user253751 Jul 11 at 11:38
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    To the people requesting additional detail or quotes from a different region, you are free to go shop this yourself. I only answered this question because I find the comment that prompted it to be extremely irritating. Converting hard currency has a cost. International companies have teams of people to hedge currency risk. If you think paying parts of percents one way or the other or a convenience fee to carry some local hard currency is some egregious scam I suggest you start a competing business with all of your extensive forex knowledge. Hell, even precious bitcoin has transaction fees... – quid Jul 11 at 17:19
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    Mostly drugs, sometimes hookers. I carry a couple hundred dollars on me when I'm at home, there's no reason not to when traveling and whining that the exchange rate at a bank is nominally worse than you can pull out of an ATM is counter productive. Cash solves problems, so I carry cash. ATM machine is broken, taxi only takes cash, whatever. I've read enough stories of people like you who rely on their bank to not flag an ATM transaction at an airport for fraud immediately after landing in a foreign country. I'll never have that problem and it comes at the cost of around $2.50. – quid Jul 12 at 0:23
23

I don't know about other markets, but for travellers based in the UK going to popular destinations, the most competitive card providers give slightly better value than the most competitive cash providers.

Both cash and card processors can charge you money for the service of converting currency in three ways:

  • A fixed fee per transaction.
  • A percentage commission.
  • A "spread" on the exchange rate (e.g. selling 1.0 EUR per GBP, but 1.2 GBP per EUR)

The best value is therefore achieved by picking a provider (a bureau de change, bank account, or credit card issuer) which minimises all three, presumably in the hope that they'll get more business, or make money from you on some other transaction. The worst value are services that maximise convenience to the customer, as they will charge for that convenience; in particular, buying currency in the airport is the absolute worst way you can convert it.

Money Saving Expert recommends taking out a credit card account with one of a handful of providers who don't charge fees or commission on foreign currency transactions; these generally use the exchange rate set by MasterCard or Visa. They used their own rate comparison tool to estimate the cost of spending €1000 in different ways:

  • On a specialist credit card repaid in full: £898
  • Cash, via UK's cheapest bureau (pick up in London): £900
  • Cash from M&S (non-cardholder): £910 [Marks & Spencer is a major high-street department store in the UK, which has in-store bureaux de change.]
  • Top prepaid card: £936
  • Using a debit card from hell: £958 [i.e the card given by default with a lot of current accounts]
  • Change at airport (Gatwick South Terminal, ICE Travel Money, not pre-ordered): £1,000

As you can see, the top and bottom costs vary enormously, but the difference between the very best card and the very best cash rate is estimated as just £2 on €1000.

So the biggest difference is not cash vs card, it's whether you've planned ahead and shopped around or not. Don't just rely on your existing card beating a high-street rate, but don't rely on the first shop you walk into offering you a good deal either.

It's also worth highlighting some disadvantages of using cards:

  • Not everywhere accepts cards. Depending where you're going and what you're doing, you may need cash for tips, market traders, or even just smaller shops that don't have a card reader.
  • If you take cash out of an ATM with a credit card, interest will generally be charged daily starting the next day. So you'll need to be able to log into your bank account and pay the balance off that day, not wait for the monthly bill.
  • If you do pay by card, make sure to opt out of "Dynamic Currency Conversion", where the merchant applies the exchange rate instead of your bank - it's almost always a worse rate.

Of course, cash has its disadvantages in turn. Most obviously, it's easy to steal, and impossible to replace if it is stolen. (Although travel insurance may offer a limited emergency cash fund in some circumstances.)

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    The last bullet point means: if the card reader asks you whether to pay in EUR or USD (assuming you're from the US and travelling to Europe) pick EUR. – user253751 Jul 11 at 11:40
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    @not_a_comcast_employee Indeed. Or, since the question is actually asked by someone in the UK, the options will be EUR or GBP, and you should pick EUR. – IMSoP Jul 11 at 13:10
  • What's "from M&S" ? – Ben Voigt Jul 11 at 15:25
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    @BenVoigt Marks & Spencer, a major UK department store chain, which has in-store bureaux de change. (I'll edit that into the answer.) – IMSoP Jul 11 at 15:30
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    Could add to the list, using Transferwise borderless account / Mastercard Debit, £901.88 (not everyone may be eligible for those credit cards), with caveat that you can only get up to £200 or so in cash without incurring fees — not sure why this option is not on their list. They are aware of it – gerrit Jul 11 at 16:31
10

It is probably inefficient to buy foreign currency at home to cover the standard big expenses of travel, but it can be incredibly useful to have a small amount of local currency to cover things like buying a bottle of water or an amazing souvenir from a street vendor or a merchant you don't trust with your credit card, making a small donation at a religious site, taking a taxi, using a pay toilet, etc.

And no, you cannot count on your ATM card working everywhere in the world, or on the currency exchange shop at your destination being open 24x7.

This kind of question is discussed a fair bit on the Travel stack.

  • It should be enough to get you away from the airport, so you can find an ATM run by a bank that doesn't have to recoup the cost of placing an ATM in one of the most expensive shopping malls in town. – Simon Richter Jul 12 at 9:10
  • @simon Richter also remember that your time while travelling is more valuable than your time while at home. – arp Jul 16 at 22:01
8

To give a slightly fatuous but technically correct answer:

Is it more economic to pre-purchase currency before travel, or use ATM cards / credit cards when abroad?

If you find yourself somewhere that only takes cash (and pace the comment you quote, even in 2019 (!) such places do still exist), then all your fancy plastic and electronics gets you a purchasing power of absolutely nil. In such cases, it's certainly more economic to have purchased currency before travel...

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    You still have the choice of using a local ATM, instead of purchasing curency before travelling. – GS - Apologise to Monica Jul 11 at 9:44
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    @GaneshSittampalam Not necessarily. In some places, there are no ATMs, because the local economy is entirely cash-based, not bank-based. There may also be charges for a "cash advance" on a credit card which wipe out its advantage over cash exchange bureaux. So I think this is an important counter-point to the hyperbole quoted in the question of "there's absolutely no need to exchange cash". – IMSoP Jul 11 at 10:12
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    @IMSoP Ok, but in most of the world, there are ATMs at international airports, and they can be accessed with debit cards that don't incur cash advance fees. There may be ATM fees, so the cost needs to be considered in comparison to other options, but why do you say "it's certainly more economic to have purchased currency before travel?" It's often much cheaper to obtain currency by using an ATM on arrival instead of expensive currency exchanges at home. If you're truly going somewhere with so little infrastructure that the airport has no ATM, sure, advance planning is important. – Zach Lipton Jul 11 at 10:19
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    @StianYttervik can you name an example of such a place? I am curious. – mirar Jul 11 at 10:44
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    @ZachLipton As I point out in my answer, advanced planning is required whichever approach you take. The cards issued by most banks absolutely will not be a cheaper way to obtain cash than a competitive high street (not airport!) bureau de change. In some cases, that planning may result in the decision of "I already have a zero-fee card, and am going somewhere where free ATMs will be available, or cards are widely accepted"; but it is folly to assume that will be true if you haven't actually done any research. – IMSoP Jul 11 at 10:47
7

I frequently travel abroad. Depending how often I am (and my ties to a particular country) I handle money when I get there in any of the following ways:

  1. In some countries I have a local bank, so I can perform some local transactions (particularly withdrawing cash from an ATM) in local currency. I can transfer money to those accounts ahead of time if I will need more, and typically do the conversion through my broker that allows me to put in limit orders to their foreign exchange platform. I get the wholesale rate for a $2.50 transaction fee, and can transfer money from there to my account at a foreign bank.

  2. In other places, I withdraw cash from an ATM using my debit card (which has a foreign transaction fee) and use a credit card (no foreign transaction fee) where possible.

The benefit of having some cash is that you can still complete a transaction in the event that for some reason the credit card doesn't work. One often runs into taxis whose credit card machines are 'broken' or (as I have found in China) simply don't accept foreign credit cards whatsoever. Depending on how things are going, you can always top-up your cash with your ATM card if you need to. You might also find that you need your PIN number for your credit card to complete the transaction (buying fuel in Iceland is one example) when you might otherwise not need it (most US cards use 'chip and signature' rather than 'chip and PIN').

Because the transaction fee is a percentage rather than a fixed cost, the additional expense is outweighed by the convenience.

I no-longer use travelers cheques (they are usually a pain to redeem), but you do need to ensure that your bank allows you to use your ATM card outside of the country, and the conversion rates are reasonable.

It doesn't hurt to have some cash before you go, at least to cover the taxi ride from the airport, as you may not know what the situation is at the airport when you get there. Worst case, you can bring some mainstream local currency (e.g. Pounds, US Dollars, Euros) and convert those to local currency at a local bank if you get stuck. Sometimes it is the only way when the country places restrictions on bringing their currency abroad (e.g. India).

However, I quite enjoy finding a local bank or ATM to see if it works with my card, and am happy to open a dispute with my bank if the ATM, without telling me, (or tells me in a foreign language I don't understand) converts the money at the ATM's rate (rather than my bank's rate). If that hassle is too much, I can understand why it might be convenient to purchase all the cash you might need in advance. Just be wary that the people who make it easiest may also be the most expensive (and that expense can be baked into the exchange rate).

One just has to be prepared for the unexpected - you could lose your wallet. An ATM could have a sticky key that causes your PIN to be entered incorrectly (and the ATM swallows your card). The bank might say your US dollars are counterfeit and confiscate them.

One saving grace is many credit cards offer 'emergency' cash services. They will with a phone call arrange to have someone come out and deliver cash or let you pick some up from a Western Union if you get really stuck and lose your card.

Conclusion Is it a losing proposition? If the amount is small and the fees are low, it can be good practice. Just be aware there may be less expensive and potentially more convenient methods.

5

I'm not sure you can generalize this. Even getting Euros varies from country to country. I got a very fair rate (in comparison to the wholesale rate) at ATMs in Ireland, and about 5% worse in Portugal (forced conversion at an unfavorable rate). Spain allowed my bank to convert but imposed a relatively high fee of a few Euros on each withdrawal. And that's all within the EU.

Thailand ATMs impose a (seemingly uniform) fairly hefty charge of 220 baht (more than 7 USD) on each transaction, and the maximum withdrawal is rather limited. Indonesian ATMs do not have high charges (but often don't work).

Chinese ATMs give a fair rate and do not impose additional charges and almost always work, regardless of which major bank is used.

In each case my bank imposes a transaction fee of CAD 5 on each withdrawal, so a larger withdrawal attracts a lower percentage penalty (of course you're then carrying more cash and you may end up having to convert it back, or worst-case having it stolen).

Usually the cambio places that are staffed at airports and in tourist areas give horrible exchange rates, in my experience, though there are some in Hong Kong (in the Chungking mansions ghetto building) that are more competitive than my bank.

About the only way to really "win" for sure 100% of the time (in cases where the merchant will accept such) is to use a credit card that does not add the typical 2.5% to the interbank exchange rate, and preferably has some kickbacks in addition. Sometimes those cards are a bit tetchy on security but Skype calls are basically free these days so it's not a huge problem. Even without the free foreign conversions, the 2.5% fee (5% spread) on most credit cards is usually better or at least no worse than the exchange places (at least in my experience).

1

Getting the physical money in places where you can pay with them is nearly always advantageous. You would, through the exchange rate, pay for the additional transport, storage etc. of the physical currency otherwise.

Before travelling, you can check through the internet for ATMs in the destination airport arrivals area. Most airports have ATMs after customs. Make sure there are two of them to minimize the risk of one being broken. If you find them and have a VISA card, you are good to go there without local currency unless:

if you need to pay for Customs or Visa On Arrival, be aware that you may have to pay cash at a really disadvantageous exchange rate before having access to the first ATM. In Muscat airport, before they changed the VISA rules in 2018, the VoA had cost me ~15% extra in exchange fees.

1

Another way to look at it: For you to buy foreign currency locally, it would first need to be transported from its original country all they to your local exchange place. When you use an ATM in the original country, that supply line is unneeded, meaning costs are lower.

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    If capitalism was a perfectly efficient system, this might be the case. But in reality, price is related to demand, not just cost, so if people are willing to pay £1.75 for every foreign currency transaction, banks will happily charge that, even though it costs them next to nothing. – IMSoP Jul 11 at 16:39
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    @IMSoP The cost is relevant to OPs musing that buying before going should be cheaper due to competition, The higher costs puts a floor under how cheap competition can make it. – StrangerToKindness Jul 12 at 8:39
  • That's a fair point. – IMSoP Jul 12 at 8:43
0

This depends on which country you are from and where you are going. E.g. changing Mongolisn currency (cash) into Euros or vice versa is cheaper in Mongolia than in Europe. If you travel from Europe to Mongolia, it is cheaper to exchange the money in your destination country. If you travel the other direction, it is not.

0

Just back from Iceland where had my credit card was refused because of fraud protection on the purchase of a coffee and a cookie! Yes I notified the bank before we left home that we were going. Glad I had spent $7.50 and got some Icelandic Krona delivered to our house before we left!

-1

No, it's not - at least not in Europe.

Suppose you have 3000GBP in your bank account that you wish to use for a lovely trip to Europe. I'll use today's rates (07/11/19, 13:30GMT) for this example.

The interbank rate is at 1.11499. I see three options:

  • Withdraw cash in the UK, exchange cash directly either at home or at the destination: the worst idea. Rates offered at physical exchanges are ridiculously bad as mentioned by other answers.

  • Use cards directly for abroad purchases: much better. Fees are less than 1% on flat interbank rates. Visa exchange is 1.1047, so we'd get 3,314.10EUR

  • Use a provider such as Revolut which requires zero fees to recharge its card, exchange the GBP to EUR (almost zero commission for the first 6,000EUR) and use EUR from card. With the exchange at 1.1146, we'd get 3,343EUR.

If we want to lock in today's rate for our purchase (i.e. we think it may become worse in the future), we can effectively purchase foreign currency before going abroad and benefit from it.

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    The best cash collection rate shown on Money Saving Expert right now is 1.103, so I'd dispute the blanket label "ridiculously bad", at least as compared with the Visa rate. (Or even the MasterCard rate, which is generally better.) – IMSoP Jul 11 at 14:18

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