What Are the Costs of Exchanging Foreign Currency?

Quick answer

• The primary costs of exchanging currency are exchange rate markups (spreads) and transaction fees.
• Exchange rate markups are the difference between the wholesale rate and the rate offered to you.
• Transaction fees can be flat rates, percentage-based, or a combination.
• ATMs often offer better rates than currency exchange booths or airport kiosks.
• Some credit cards or debit cards have no foreign transaction fees.
• Always compare rates and fees from multiple providers before exchanging.

Who this is for

• Travelers planning international trips who need to convert USD to a foreign currency.
• Individuals or businesses who frequently send or receive international payments.
• Anyone seeking to understand the hidden expenses associated with currency exchange.

What to check first (before you act)

Your Goal and Timeline

What do you need the foreign currency for? Is it for a vacation, a business trip, or a long-term investment? When do you need it? Understanding your specific needs will help you choose the most cost-effective exchange method. For example, a large amount needed for a business transaction might warrant different research than a small amount for a weekend trip.

Current Cash Flow

Assess your current financial situation. Do you have the funds readily available, or will you need to dip into savings or take on debt to exchange currency? Knowing your cash flow helps determine how much you can comfortably exchange and what methods are feasible.

Emergency Fund or Safety Buffer

Before exchanging significant amounts of currency, ensure you have an adequate emergency fund. Unexpected events can happen, and having a safety buffer in your home currency can prevent you from having to exchange money back at unfavorable rates or incurring additional fees in a pinch.

Debt and Interest Rates

If you’re considering borrowing money to exchange currency, compare the interest rates on any potential loans against the expected exchange rate. High-interest debt can quickly erode any perceived savings from a favorable exchange. Prioritize paying down high-interest debt before exchanging large sums.

Credit Impact

Some methods of obtaining foreign currency, like using a credit card, can impact your credit score. While convenient, consistently using credit for everyday expenses abroad and only paying the minimum can lead to debt and interest charges. Conversely, responsible use of a travel-friendly credit card can be a cost-effective option.

Step-by-step (simple workflow)

1. Determine Your Foreign Currency Needs

• What to do: Calculate the exact amount of foreign currency you anticipate needing, considering your travel plans, accommodation, food, activities, and any planned purchases.
• What “good” looks like: A clear, itemized list of expected expenses in the local currency, with a small buffer for unexpected costs.
• A common mistake and how to avoid it: Overestimating or underestimating needs. Avoid this by researching average costs for your destination and activities.

2. Research Exchange Rate Providers

• What to do: Look into banks, credit unions, online currency exchange services, airport kiosks, and travel agencies.
• What “good” looks like: A list of at least 3-5 potential providers with their advertised exchange rates and fee structures.
• A common mistake and how to avoid it: Only checking one provider, often the most convenient one like an airport kiosk. Avoid this by dedicating time to compare multiple options.

3. Compare the “All-In” Cost

• What to do: For each provider, calculate the total cost of exchanging your desired amount. This means looking at the exchange rate offered and any associated fees.
• What “good” looks like: A clear comparison showing the final amount of foreign currency you’ll receive after all costs are deducted.
• A common mistake and how to avoid it: Focusing only on the advertised exchange rate, ignoring fees. Avoid this by always asking for the “total cost” or “amount received” for your specific transaction.

4. Understand Exchange Rate Markups (The Spread)

• What to do: Find out the current mid-market exchange rate (often called the interbank rate) and compare it to the rate the provider is offering you.
• What “good” looks like: The difference between the mid-market rate and the offered rate is as small as possible.
• A common mistake and how to avoid it: Not knowing the mid-market rate. Avoid this by checking reputable financial news sites or currency converters for the current interbank rate.

5. Identify Transaction Fees

• What to do: Note any flat fees, percentage-based fees, or minimum fees charged by the provider for the transaction.
• What “good” looks like: Low or no transaction fees, especially for the amount you are exchanging.
• A common mistake and how to avoid it: Assuming fees are included in the exchange rate. Avoid this by explicitly asking about all fees before committing.

6. Consider Card Options (Credit/Debit)

• What to do: Check if your credit cards or debit cards have foreign transaction fees. Look for cards specifically designed for travel with no or low foreign transaction fees.
• What “good” looks like: A card with a 0% foreign transaction fee and a competitive exchange rate when used at ATMs or for purchases.
• A common mistake and how to avoid it: Using a debit card with high ATM fees or a credit card with a significant foreign transaction fee without realizing it. Avoid this by checking your cardholder agreement.

7. Evaluate ATM Withdrawal vs. Cash Exchange

• What to do: Compare the potential costs of withdrawing cash from an ATM abroad versus exchanging physical currency. Factor in ATM fees from your bank and the foreign ATM, plus the exchange rate.
• What “good” looks like: ATMs often offer more favorable exchange rates than physical exchange booths, especially if you use a card with no foreign transaction fees.
• A common mistake and how to avoid it: Assuming all ATMs offer the same rates or fees. Avoid this by researching your bank’s policy on international ATM use and looking for ATMs affiliated with major networks.

8. Pre-order Currency if Necessary

• What to do: If you need a significant amount of foreign cash, consider ordering it online from a reputable currency exchange service for better rates and convenience.
• What “good” looks like: Receiving your currency within your timeframe at a competitive rate, often better than walk-in services.
• A common mistake and how to avoid it: Waiting until the last minute. Avoid this by planning ahead to allow for delivery times and to compare options.

9. Exchange Only What You Need

• What to do: Try to exchange only the amount of foreign currency you will realistically use.
• What “good” looks like: Minimizing leftover foreign currency, as exchanging it back often incurs further losses.
• A common mistake and how to avoid it: Exchanging too much and having leftover currency. Avoid this by budgeting carefully and sticking to your spending plan.

10. Be Wary of Dynamic Currency Conversion (DCC)

• What to do: When paying with a card abroad, if offered the option to pay in your home currency (USD) or the local currency, always choose the local currency.
• What “good” looks like: Paying in the local currency, allowing your bank or credit card issuer to handle the conversion at their typically better rates.
• A common mistake and how to avoid it: Accepting DCC without understanding the implications. Avoid this by always selecting the local currency option on card terminals.

Common mistakes (and what happens if you ignore them)

| Mistake | What it causes