Currency for Travelling

If you are travelling overseas there are some important decisions to make about how you organise your foreign currency and overseas spending. Choose the wrong option and you could lose up to 8% of your spending money. In this report we will discuss five alternative forms of foreign currency and how to keep costs to a minimum.

Cash

Exchanging a modest amount of Australian Dollars for foreign notes (cash) before you travel is always a good idea because you can be guaranteed that you will have funds on arrival. All the other forms of accessing foreign currency are subject to risk, for example the ATMs at the airport where you arrive could be out of order, or nonexistent.

It pays to shop around when purchasing notes because the rates and commissions can vary greatly. Generally airports will have the least attractive rates - margins of 8%+ built into rates are a common occurrence! You should compare the banks with online providers such as Travelex. Ask the providers how much foreign currency you will receive for a given amount of Australian Dollars including all fees and charges, and go with the one that generates the most foreign currency. Another advantage of taking cash is that you are locking in the exchange rate, reducing the chance that unfavourable volatility in exchange rates will make your trip more expensive.

Another key point to remember is that taking large amounts of cash overseas presents obvious personal security risks, and in addition, can contravene Anti Money Laundering regulations in many countries. Using the other methods outlined below, you should be able to get better rates rather than exchanging for cash.

• Summary: Very convenient, poor security, exchange rates and fees are normally unattractive.

Travellers' Cheques

Once the product of choice, travellers' cheques have waned in popularity in recent years because of more convenient alternatives. Despite the change in popularity, they still have some very useful characteristics. They are more secure than cash because they can be replaced if lost or stolen.

Unlike credit or debit cards, you set the rate of exchange when you buy the travellers' cheques, as opposed to when you make a purchase or withdraw funds from an overseas ATM. Locking in a rate will protect you from unwanted exchange rate surprises. Finally, in less developed countries access to ATMs may be limited. If travelling in such countries, travellers' cheques (usually US the best denomination) are an effective alternative. As with cash it is good to shop around because exchange rates, fees and charges vary widely.

• Summary: Good for countries with poor banking infrastructure, rates are locked in prior to travelling, good security, exchange rates and fees are normally unattractive.

Prepaid Currency Cards

These cards are attractive to some people because it allows you to mimic the travellers' cheque experience by purchasing a fixed amount of foreign currency to load onto a card. Some people find this a good way to budget for their trip rather than using credit cards.

Prepaid currency cards also have the benefit that the foreign currency is purchased before you leave and therefore you are less exposed to exchange rate movements whilst you are away. Like travellers' cheques they are also replaceable if lost or stolen.

Unfortunately prepaid currency cards can be very poor value because of exchange rates, loading fees, ATM fees etc. Exchange rate margins for prepaid currency cards typically exceed 6%, combined with other fees. This means you can lose a lot of your spending power before you even leave the country.

There are a number of providers for this kind of service, make sure you read the fine print and compare the rates versus other forms of foreign currency exchange.

• Summary: Convenient, rates are locked in prior to travelling, good security, however exchange rates and fees normally unattractive.

Credit/Debit Cards

The growth in worldwide ATM locations and the ability of those ATMs to accept foreign credit/debit cards has been by far the biggest factor in the decline of travellers' cheques. Credit/debit cards generally offer the best deal when it comes to spending whilst overseas.

Generally the exchange rate margin built into credit/debit cards is between 2% and 3%. You would also normally be subjected to fees for ATM cash advances, which would usually be a fixed amount or another 1-2% - whichever is higher. By minimising cash advances in favour of paying for goods and services using a credit card, you reduce the costs associated with ATM withdrawals.

Before you leave, you should check the exchange rate margin and fees with your card provider as they vary greatly. Some cards have very low exchange rate margins (under 1%) and low fees, which make them the best choice for the bulk of your foreign currency requirements.

• Summary: Convenient, exchange rate set at time of withdrawal/purchase, generally good exchange rates and low fees - check with your card provider.

Dynamic Currency Conversion

When overseas, you may be asked by merchants whether you want the cost of an item or service converted to Australian Dollars at the point of sale. The merchant would explain the benefit is that you will know the Australian Dollar cost immediately, however the exchange rates offered tend to be extremely poor, and the merchant would be getting a slice of your exchange profit. You would generally be better off letting your bank handle the conversion.

• Summary: Convenient, however exchange rates and additional fees are normally unattractive.

For more information there is an excellent Choice report here.