Whether you travel out of country, or buy goods online from non-domestic retailers, credit cards can be one of the best ways to lower your foreign exchange costs. While there are many options to convert your currency, whether at the bank, foreign exchange office, airport, hotel, ATM, debit card, or at the point of sale through dynamic currency conversion, we believe a no foreign transaction fee credit card is the cheapest of all. In fact, we’re positive.
Here’s why. To start, everyone has to know a few common terms. The first is the spot rate. Typically, the spot rate is the foreign currency conversion rate you’ll see in the newspaper. It’s a rate based on significant amounts of money being traded, call it your market rate. However, for the rest of us who will be exchanging hundreds, thousands, or tens of thousands of dollars, we’ll be paying the spot rate plus a fee that will be charged by the entity exchanging your money. That fee is how foreign exchange bureaus and banks earn their profit on currency exchange. It’s their margin.
The spot rate is non-negotiable. The one area that is negotiable, and where you will see large differences in rates is in the foreign exchange fee charged on top of the spot rate. No one makes it easy for you to break out the spot rate from the foreign exchange fee. Banks and foreign exchange bureaus will typically combine the two so you have no idea how much your actually being charged in fees over and above the spot rate.
However, when you use a credit card, debit card or take money out of the ATM, you are told in advance exactly how much the bank will charge you over and above the spot rate, because they are legally required to do so. In most cases it’s somewhere around 2%-3%. That’s actually a pretty competitive rate, when compared to how much a bank branch will charge you if you walked in off the street. It’s much better than hotel or airport foreign exchange counters, which can charge 8% to 10% when you include all their fees.
However, the new trend of no foreign transaction fee credit cards, don’t charge any fee above the spot rate at all! It seems too good to be true, but it is. Essentially, if your issuer offers the credit card, Visa or MasterCard will charge the spot rate to the bank, which will then be charged to you. But, it’s up to each individual issuer to charge a foreign transaction fee, which they’ve decided to forego. The credit card issuer is still benefitting because they’re getting interchange revenues and possible net interest margin. So it’s a win-win for all.
As a result, the next time you go on vacation or decide to purchase an item online from out of country, do so with a no foreign transaction fee credit card, and you won’t pay a single dime more than you have too in foreign exchange fees.