Tuesday, April 6, 2010

Foreign Currency: when to exchange

If asked to recall my least fond memories I think going over foreign transactions in my accounting classes would rank pretty far up there. When you're used to dealing in one currency it is confusing to compare it to others. What is even more confusing is when you start throwing in questions like "If this happens does it mean the value of the dollar is getting stronger or weaker?" I would have tried to write a scenario but I haven't had my coffee yet and it would confuse you anyways.

The reason why this is confusing is because there are two different rates you are really dealing with when you exchange money. You need to understand how much 1 unit of money is worth in another currency. You also need to understand how much 1 unit of that other currency is worth in your currency. That's two different exchange rates and for many it can get confusing, especially if you're trying to determine other things like transaction fees.

To lessen the brain pain I decided to stick with one figure. How much do I have to pay in USD to have one Euro? The exchange rate is forecasted to rise to around 1.40 or so when I'm in Europe. (US dollar getting weaker) This means $1.40 US = 1 Euro. Currently the exchange rate is at $1.33. Most of this trip is going to be covered in cash so I need to get a pretty firm grasp on what the best options are for me and how to save the most money. Pennies don't sound like they matter but when you have about a few thousand dollars they really do add up!

My options:

US Bank
I called up my bank to see how much of a fee they might charge as many can charge percentages of what you are withdrawing and they actually said "we own all the ATMS in Europe so there is no fee, only the ATM fee". I am not 100% sure I believe this claim but I'd like to at least trust that my bank won't charge me a fee.

The plus is that banks usually have some of the best foreign exchange rates so I know that I'll be getting as close to my money's worth as I can on the day I withdraw.

The problem with using the money in my bank is that it will be intermingled with the other money I have in there that I need to use to cover automatic withdrawals for student loans, car payments, and other bills during the month. The least amount of thinking I have to do with money on this trip the better. I'm already going to be managing my work's two bank accounts.

Credit Cards
I have a plethora of credit cards but all of them but one charge foreign transactions fees. They charge anywhere from 1 - 3% and if I did a cash advance they also charge a 3% fee for that plus a ridiculous APR tacked on for the balance. There's no need for me to take a cash advance on a credit card, thankfully.

I've never used it until now but I have a Capital One credit card that does not charge any foreign transaction fees at all so I will be using them for one or two of my bigger transactions. I don't anticipate charging any more than two hundred euros on this account, but it is nice to know that they do not have any fees. I will not need any other credit cards.


Travelex offers to exchange money before you leave. I will need some Euros in my hand when I get there so I will need to use their services. However, if you exchange under $500 there is a fee and the rate is awful. They are, of course, making money this way but they are taking about 13%. Currently 1.53 USD = 1 Euro. This means you are paying .20 more for each dollar. Ouch! If you exchange over $500 they give you a much better rate but I can't remember what it was as they offered me the option to purchase something called a cash passport card.

The Cash Passport Card is just like a prepaid debit card. It has a Mastercard or Visa logo on it and you can use it at any bank to withdraw up to 700 euros a day. The transaction fees are 1.75 euros for each ATM withdrawal. There are no foreign exchange fees since the money on your account is loaded in the foreign currency.
You can use it at any place that accepts credit cards as well. The money is loaded in the currency of your choice (currently I think they only accept euros, pounds and us dollars) so it is locked in at the rate given on the date of purchase. As long as you spend over $500 they are currently offering 1.40 USD = 1 Euro.

After giving it some consideration I've decided to load my money onto one of these cards. I am not getting the best exchange rate but if I wait until I visit in May to pull money from the banks over there the exchange rate is forecasted to be on par with what they are currently offering. Travelex also offers online access so I can see how much I've spent and they also have 100% fraud protection. If it is stolen they Fed-Ex a new card to you overnight for free to wherever you're staying. I would like to keep my money separate and this is a good way. All ATM fees are fixed so everything is predictable. I'd like to keep the least amount of money on me as possible but ensure that the money I do have is safe. The main reason why I chose this card though was so I wouldn't have to worry as much about the exchange rate fluctuations.

For the math geeks:

Overall I am losing about $86.
2860 x .741 = 2119.26 - this is what I'd receive in Euros at the real 1.33 exchange rate

2860 x .711 = 2033.46 - this is what I will receive in Euros at their exchange rate

Hopefully my calculations are correct.

So, today I took the day off work to run a few errands and this will be one of them! I've also got to dispute a parking ticket ($80!!) and try to get it reduced. Wish me luck!


  1. good info. i forgot about the foreign transaction charge on credit cards. i have to review all my terms this w/e, so i will add that to my list of things to check for.

    i'm doing the atm deal, mostly. i'm going to need a fair bit of cash, and pulling it from the atm there won't cost me anything above a transaction fee from my credit union, so i'll take the max amount for a couple of days and call it even.

    i was so freaked out about running out of cash in paris. bank cards/atms were not as uniform then, and although my card had the appropriate insignia, it did not fit into the atm machines in paris. see how scary it was in the olden days! ;)

  2. wowza! that's a lot to think about. prepaid card sounds like the way to go, though. :)

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