When the United Kingdom voted to leave the European Union, the British pound dropped by 10 percent in just a few hours. This was a rare event but it a put a spotlight on how the values of currencies are constantly changing.
Foreign exchange is a big concern for any traveler—you want to get the best rate right? But is there an ideal time to exchange your money?
Technically speaking, yes, but there’s no way to tell when that time is. Instead of worrying about when to exchange money, it’s better to focus on minimizing the foreign exchange fees you pay since you can save big in the long run.
Understanding foreign exchange fees
One misconception is that the exchange rates listed online are available to the public. Those are actually the wholesale rates and only available to banks. The rate that travelers pay is set by the institution where they’re changing their money.
Most people, by default, will go to their bank, but the rates banks offer aren’t exactly the best. If you’re exchanging your money for a neighboring country e.g. Euros to pounds or U.S dollars to Canadian dollars, your bank will have competitive rates, but if you’re looking to exchange your money in a country farther away, it’s not uncommon for banks to charge upwards of 10%.
Why you should use local ATMs
Using a local ATM will almost always be the cheapest way to get cash. VISA and MasterCard (who own the ATM networks) set the spot rate, which is the current exchange rate, and charge a foreign transaction fee of about 2.5%. (This differs depending on your financial institution.)
Keep in mind that the ATMs you use may charge you a one-time fee, and it’s entirely possible that your bank will charge you for using your bank card abroad. You can minimize these costs by withdrawing your daily limit or checking with your bank to see if they have a partner ATM network where you won’t be charged.
It’s also worth noting that some foreign exchange offices (at home and abroad) will have better rates, but you’ll have to check the rates at each one. Compared to using local ATMs, you might only be saving a few dollars so it’s probably not worth the trouble.
Avoiding foreign transaction fees altogether
Similar fees apply to credit cards when you charge your purchases in a foreign currency. You won’t pay those one-time fees, but you will pay the additional 2.5% in foreign transaction costs. (This rate differs depending on your credit card provider.)
The good thing is, there are some credit cards available that don’t charge this foreign transaction fee—you’ll pay just the spot rate. Since every country has different cards, you’ll need to research which credit cards offer this benefit in the country where you reside. (Here are examples of Canadian credit cards without foreign transaction fees.)
Some people are hesitant to sign up for another credit card, but the long-term savings are worth your trouble since you’ll be guaranteed the best rates.
The bottom line
Trying to time the markets is never a good strategy—it’s best just to focus on minimizing your fees since you actually have control over them.
It’s impossible to predict which direction currencies are headed. The drop in the British pound was an extreme case. Recently, other major currencies including the Turkish lira, Japanese yen, Chinese yuan, and Brazilian real all took major hits too but even then it was only by a few percent.
Keeping your costs down is easy as long as your withdrawing money from local ATMs and charging your purchases to a no foreign transaction fee credit card.