As I’ve written about before, I have been able to obtain American Express credit cards in the UK as I continue the journey to build credit in a new country, though the credit card market is hardly lucrative there.
I also travel internationally as much as I can and would estimate that close to 50% of all purchases I make are in foreign currencies.
Fortunately in an innovative market like the UK, there has been no shortage of new debit card products, and every year or so a new product comes along with no foreign exchange fees on purchases, and even cash withdrawals in other countries and currencies with no fees (at least initially). This has been wonderful for travelling and my current debit card of choice is Monzo, which every Gen-Y-er in London seems to have.
However, these debt cards have one big negative — they do not earn points or miles. So each time I go to make a purchase in a currency other than GBP, I am faced with a choice. This is none more evident when I book a flight leaving from continental Europe that is priced in Euros. I grab my wallet and select a card to pay, choosing between a points earning credit card, and a no foreign exchange fee debit card.
To make this decision I always ask myself the same three quick questions:
- What points would I earn by using a credit card versus a debit card?
- What would those points be worth?
- How much might I be paying in foreign exchange (FX) fees to earn those points?
Say the flight I’m booking costs the equivalent of £100, but it is charged in Euros. If I choose to use my UK American Express, here is what they tell me will happen:
What fees will I be charged?
If you make a transaction in a foreign currency, you will be charged a non-sterling transaction fee of 2.99% on the transaction amount. If you use your Card to withdraw cash abroad a cash fee of 3% of the withdrawal amount or £3 (whichever is greater) will be payable in addition to the non-sterling transaction fee.
Therefore the transaction fee of 2.99% will apply, so I’ll be charged a £2.99 transaction fee. This card earns me 1.5 Avios for each pound spent, so for my £100 spend I’ll earn 150 Avios.
I won’t earn any Avios on the transaction fees.
So I would be paying three pounds extra, in order to earn 150 Avios. I usually try to get more than 1 pence value from each Avios I redeem, but rarely more than 1.5 pence per Avios, so my conservative valuation is 1p per Avios. Even if I managed to get 1.5p per Avios value from those 150 Avios (so £2.25), it has cost me £3 in foreign exchange fees to acquire them.
If I wanted to spend more money than the value of the points to acquire them, I could just purchase Avios from British Airways directly.
So, as much as it pains me to do so every single time, in this circumstance, I use my fee-free debit card for all purchases in foreign currencies. I recognise this is blaspheme for someone obsessed with miles and points like myself, but I need to be sensible and not spend more to acquire the points than they are worth.
Choosing your currency
When I use my debit or credit cards overseas, either for purchases or cash withdrawals, I’m often invited to choose between paying in the local currency (i.e. USD), or the currency the card was created for (i.e. GBP). I’m usually encouraged by the payment terminal to accept a conversion on the spot so I can ‘lock in the rate and there’s no uncertainty.’
But here’s the thing.
Always, always, ALWAYS select to pay in the local currency. Ignore any invitations to ‘avoid uncertainty.’ This is because if you decline the conversion at the time and let the ‘banks’ sort out the conversion rate, that rate will be close to a market rate. However where you choose the ‘convenience and certainty’ of locking in the rate at the time of the purchase, the rate you receive will be much lower (this can several percent more) meaning you will pay more.
It makes my blood boil that so many consumers are tricked into thinking they are getting a good deal when they are misled by the offer of ‘removing uncertainty’ in the exchange rate when 99% of the time that uncertainty will work strongly in their favour, because the market rate will be much higher.
Credit card surcharges
On top of any fees your credit card provider may charge for using your card in a foreign currency as I have discussed above, some retailers, especially in Australia, will charge you a surcharge for using certain credit cards (especially American Express) in their establishments.
This varies hugely depending on where you are travelling, but in general I try and avoid using cash wherever possible. In the UK I no longer carry any cash around as if a retailer does not accept cards then they are not worth visiting. I was also very pleased to see signs in shops in Sweden earlier this year saying ‘card only – no cash’ at many registers.
However in places like Germany (particularly Berlin), cash is still king. To obtain cash in the local currency, you can either exchange physical cash in another currency (i.e. your home currency), or withdraw the cash from an ATM/cash machine.
When deciding between the two options, do try and understand the difference in exchange rates. The ‘no commission’ money exchange outlets may offer a much lower rate than you would receive from an ATM, even accounting for any withdrawal or exchange fees your card issuer may charge for using the ATM.
For example in Berlin last year I needed to either exchange GBP for EUR, or withdraw EUR. I asked at a retail money exchange store how many EUR I would receive for GBP100 and they advised me I would receive less than EUR100, despite the official exchange rate being around GBP1:EUR1.15.
I instead decided to use and ATM instead where I received around EUR110 (including fees) so came out way ahead.
If you have a card you can use at foreign ATMs with no fees I would always recommend using that. If you are hit with fees try and calculate the amount you would receive (less the fees you would be charged) to compare to a retail money exchange option. You may be charged both a fee by the ATM operator for using the ATM, as well as an FX fee by your bank for withdrawing cash in a different currency. These ATM fees can be substantial – I’ve seen THB300 in Thailand ATM withdrawal fees before which is almost US$10!
My American Express charges 2.99% for foreign purchases, or the higher of 3% or £3 for cash withdrawals in foreign currencies, so if I was using my American Express overseas I would be trying to use the card for purchases rather than withdrawing cash to then use for those same purchases.
Charged in GBP but processed in EUR?
This is where its gets tricky. I often see prices in GBP, but I know it is from a EUR based company (i.e. airline). I try and see if there is any guidance when I get to the payment screen but usually assume:
- That the charge will be in EUR (the equivalent GBP rate); and
- It will be classified as a foreign transaction.
Therefore, I use the GBP price as a guide only, but recognise that it is actually a foreign transaction, charged in a foreign currency, and I will usually use a fee free debit card to pay for this where the FX fee would be higher than the value of the points I would earn by using a points earning credit card, as I have detailed above.
If you have a credit card that charges no foreign exchange fees you’re in a great position because you can continue to earn points while making purchases in foreign currencies.
I do feel for travellers who aren’t savvy with FX rates and exchange fees though. They may feel they are getting a great deal with the purchase they are making, without realising the awful exchange rate, or otherwise hidden fees they will have to pay.
And because they probably don’t check their credit card statements, they end up paying more than they thought they would and would just chalk a large credit card bill up to ‘the cost of travelling.’
Travelling doesn’t need to be so expensive if you are careful.
My Father uses a pre loaded travel debit card when he travels, which he thinks is the greatest thing since sliced bread, even though he receives a terrible exchange rate each time he uses it.
What’s your strategy for purchases in foreign currencies?