Tips For Using Credit And Debit Cards In Foreign Currencies

Filed Under: Advice, Travel

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?

FX fees

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.

You can see this post for more about how to approach retailer imposed credit card surcharges.

Withdrawing cash

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:

  1. That the charge will be in EUR (the equivalent GBP rate); and
  2. 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.

Bottom line

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?

  1. While I think you made some excellent points with regards to money conversion, I think you completely missed something far more important when we talk about credit and debit cards and there used overseas.

    the US based credit cards offer Maximum Protection for consumers when purchasing goods, particularly those goods that may fail or my failed to be delivered to the end user such as art or other products that are shipped back home. When a merchant fails to deliver on a promise, the US based credit cards offer dispute protections that are not always found on those credit cards issued by banks overseas or for which are offered by debit cards, particularly those debit cards issued overseas.

    so before using a product other than a US based credit card, I think it is very important for anyone to do the research with regards to the debit card or with a credit card that might be issued overseas. this might not be important when paying for a lunch, but it is extremely important for select goods.

  2. Informative post! I had an odd situation happen to me in a Santorini. I wanted to withdraw €400, and it said the USD conversion of that would be $520, plus any additional fees. That came out to an exchange rate of 1.3, when all my currency apps said the exchange rate was 1.16. So in theory that should have only been $460-$470. I also paid a $5 fee. Any ideas what happened here? Can banks charge a higher rate – especially in touristy areas – to make more money?

    FYI – I opened the Charles Schwab investor checking account with fee reimbursement, but I was waiting for funds to clear in my account, which is why I couldn’t use that card.

  3. You should actually note that, at least for my Miles & More MasterCard issued by DKB, the „foreign transaction fee“ will also apply if I selected to be billed in EUR instead of the local currency for the purchase or withdrawal. Hence, in addition to the really bad exchange rate the foreign payment processing company will grant, I will also have to pay the 1.75% processing fee that is charged by my bank (even though the payment was made in EUR). In the end, this never seems to be a good deal – and I suspect that the applicable processing fee is not determined by the currency that was used, but rather by the country from which the payment was made. For example, when booking flights from Germany to Switzerland on SWISS (which are always charged in EUR), I was once charged the fee, as the transaction was coming from Basel instead from their usual branch in Madrid which would usually initiate EUR payment transactions back then.

  4. @James
    Probably the card your Dad uses is the Qantas or Virgin ( or one of dozens of others, eg, Australia Pist). The exchange rate isn’t lousy when you use it…it’s the official Visa rate, rather the lousy deal comes when you load it with foreign currency because you get the something like the official rate -4or5%, ie a pretty terrible deal. But they can be useful when you want to have a wallet of currencies on the one card ( but of course you get stung again when moving money between currencies).
    Sometimes they have special rate offers and it can be borderline worth it to load up when they do. Those cards do earn points, but not at a great rate ( eg 1 for 1).
    I put some USD on a card about 5 years ago, didn’t use them ; the rate was .92 or so to the AUD, ie pretty terrible at the time; but now with the the AUD @ .72 it looks like genius ( but in fact just laziness in not clearing the funds).

  5. Thanks for the information James, very much appreciated.

    Comments in here can be harsh. This is a blog, not a thesis defense. Besides i dont care what US-based credit cards can offer since i am not US-based, nor should a non-US blogger

  6. Don’t forget the valuable travel insurance that may be offered on points earning credit cards! In some cases, the extra peace of mind can make up for the higher FX fee.

  7. “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.”

    This is generally untrue in south and south east asia… and you can also always go exchange cash at a local bank as well.

  8. thanks james for this post. i live in the u.s. but its still interesting to read situations that others come across. i have a question though: why do you get charged foreign transaction fees on your u.k. card when you buy airfare from british airways which is based in the u.k.?

  9. James, if you think Berlin is bad re cards, Munich is 10x worse (despite being the richest city in Germany). In Berlin, every cab took credit card, and no grief as long as the fare is over 10 EUR. In Munich, many taxi drivers at the airport refuse to take card, despite the fare to the city center being 75 EUR.

    Frankfurt is closer to Berlin, with little grief from taxi drivers about paying with card.

  10. @Jeff Shilling “US based credit cards offer Maximum Protection”. UK-based credit cards offer something called Section 75 protection, which is even better than the dispute mechanisms you mention. Section 75 means that the credit card issuer is jointly liable with the retailer in the event of a dispute, so it even covers cases like supplier bankruptcy. UK credit card protection is superior to the US, even if the points earning potential is much less.

  11. Fortunately here in the US, most points-earning cards do not charge FX fees, so the point largely becomes moot. On your point about local vs. home currency, there is another very, very bad thing about choosing to pay in home currency – you will STILL be hit with a FX fee. So not only do you receive a crappy exchange rate, you’ll pay an additional 3% on top of that.

    @Jyoti – it sounds like you were hit by the dreaded “dynamic currency conversion” that James discussed. ATMs in Greece (and most of Europe) will ask if you want to be charged in home currency (USD in your case) or euro. If you choose USD, you’re being swindled by DCC. It’s not the bank cheating you; instead, it’s a foreign currency shop that buries a commission in the exchange rate (which makes it so terrible), and shares a cut of the commission with the ATM’s owner. I’ve noticed some ATMs make this quite confusing, but ALWAYS choose the option to charge your debit card in euro.

  12. @ km – I don’t. But if I bought an easyjet flight from Spain to Germany (as per the screenshot) it would be charged in the currency of the departure airport (EUR) despite easyjet being registered in the UK and selling ex-UK flights in GBP.

  13. That conversion trick (DCC – “Dynamic Currency Conversion”) is really insidious. In Europe, this used to be prevalent with ATMs, though times are changing and I’ve read a report recently that merchants are being actively incentivised to enable DCC on their PoS terminals and encourage customers to accept. In the past, I used to only see this in the US, though I’ve come across this in a Barcelona restaurant just last week. Was I glad that I speak Spanish, so that I understood what the terminal screen was telling me. Of course it takes TWO steps to actually reject the proposed conversion rate.

    As for getting foreign currency, I now rely exclusively on ATMs. Retail exchange offices are too much of a hassle. In my current home city of Prague, there’s even a YouTube series in English about scammy exchange places that advertise “0% commission”, yet trade 15 CZK/1 EUR while the market rate is ~25 (often with small print to hide obscure T&Cs). We may be #1 worldwide in contactless payments, but I still can’t go completely cashless like in Scandinavia. Looking forward to the day, though.

  14. I’ve seen DCC in Europe for at least 5 years – typically at hotels. It’s always, always, always a very bad deal.

    One other thing to note about US Cards is that US Cards are typically, chip and signature cards — not the World Standard chip and pin cards. That can create some acceptance problems. There are now an increasing number of cards that are coming out with the “tap” or “contactless” feature, which also can work where a chip and signature card wouldn’t work. Look for the contactless symbol on the back of the card. Costco Visa’s have this feature.

  15. On my travel I found that in Europe most US-based VISA and MC are accepted with swipe-and-sign (even there is no requirement to sign for purchases in US) and do offer option 1 (for Euro) and option 2 (for USD). The rate between options is close to market rate in my experience (now close to 1:1.16), so this does not matter for cards with 0 FX, but can be useful for cards that charge FX fees, saving cardholders around 3%.
    At ATMs the ‘recommended’ exchange rate is typically exuberant like the author mention. But when I chose option to convert later (meaning bank market rate), it came out to be 1:1.16 – right on – the most economical exchange possible. You just have to find ATM machine with Zero or low exchange fee, and use debit card with ATM-fee refund option to further protect yourself from extra changes posed by the banks.
    Extra note: many banks offer lock-in/lock-out option for debit cards – this can be useful for additional security while traveling: you can carry deactivated card and easily activate it with phone app once need to pull money from ATM, then lock it up again. The app works instantly and no phone calls required to the bank to do it. Capital One is one of the banks that offers such function and ATM fee refunds.

  16. You could use the Tandem credit card in the UK which pays 0.5% cash back and has no international fees

  17. James – Revolut (and probably Monzo and Starling) offer the opportunity* to avoid all exchange rate spread and have no FX fees.

    * Remember to change enough to the spending currency before the weekend

  18. @Callum

    Sort of :

    “Convert currencies at live-market rates, make international purchases online or in store securely and without unexpected charges and manage your spending in real time. Do all this and more via a simple, sleek interface.”

  19. What about someone like me, an expatriate with access to US cards (I maintain a US address) who makes all his money in local currency and has to choose between A) buying in local cash and B) converting and paying a bank fee to send cash to a US account in order to pay CC bills? (FYI, no online money services operate here (Taiwan), so sending money at the bank is the only option.)

  20. Cacton FX for prepaid ATM withdrawals and Curve for front ending all your credit cards plus up to £200 per month of cash withdrawals from CCs categorized as purchases. Both are FX free, Curve allows you to change what actual card is used in real time via an app and even after the payment is made up to 10 days, it allows you to pay with credit card for something that only accepts debit cards (so for example you can pay off Amazon’s New Day white labelled card using the very same card via Curve hence rolling over interest free indefinitely up to 50% of your credit limit). But best of all of you are held up and forced to divulge your PIN, your losses are limited assuming you have none of your real cards with you.

  21. I only travel internationally once every year, but usually fit in quite a few countries. I’ve NEVER seen, heard of, or used a foriegn currency exchange place that didn’t cost more (often much more) than an ATM withdrawal.

    I thought this was interesting (pertaining to US account holders going overseas)…from BofA:

    “Who sets the exchange rates for foreign ATM withdrawals with my Bank of America ATM card and for international purchases with my Bank of America credit and debit cards?

    The exchange rate for international purchases and foreign ATM transactions is set by Visa® or MasterCard®, depending on your card’s logo. This exchange rate is either the wholesale market rate or a government-mandated rate on the day before the date the transaction is processed. The processing date may differ from the date of the transaction. ”

    Again, I’ve NEVER had an ATM rate that wasn’t the market rate (B of A or Wells Fargo debits used). The only added charge I’ve seen is sometimes a higher ATM fee for the international withdrawal. Is this specific to the US?

  22. There are three points that I would add to this:
    1. Credit Card Protection
    As someone else briefly mentioned, American cards have great credit card protection for fraudulent activity. For many cards issued in other countries there are different rules that apply. For example, in some countries, the merchant has to be willing to give you the credit.
    2. Interest on cash from a credit card
    You just mentioned the charge for withdrawing cash, but if you withdraw cash from a credit card, besides the fees, there are high interest charges.
    3. Debit card ATM fees vs cash charges
    You seem to suggest to bring cash to convert; however, I would argue that using the ATM, especially for Americans, could be better. Many banks offer rates that are close to market rate. Many banks avoid ATM transaction fees with any bank or some have cooperation with other banks abroad to avoid fees at that bank’s ATMs (such as Bank of America and China Construction Bank).
    4. Cash depends on your home currency
    Whether or not bringing cash with you is suitable depends on your home currency. You assume people are dealing with one of the major currencies such as USD, GBP, EUR, etc; however there are many currencies that exist in the world with either a) limits of how much you can bring out of the country and b) controlled currencies in which exchanging overseas is very difficult or impossible. It is possible that not many people use one’s currency, as well, making it rare. This also leads to my final point.
    5. Qualifications for credit cards
    There are various qualifications in other countries to qualify for a credit card. In the US, access to credit is relatively easy, but in many other countries you not only need a local address, and sometimes have to write a statement in a local language, access to credit is limited.

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