Money Matters
When I first began traveling internationally, I had to send a foreign bank draft to reserve my hotel room. Some hotels accepted American Express to hold a hotel room, but neither Visa nor MasterCard allowed this. Now, I can hold or pay for hotel reservations almost anywhere in the world via credit card over the Internet. Back then, options for getting foreign cash were travelers checks, exchanging cash or ordering foreign currency at home.
Exchange windows at airports often offered poor rates, and there were surcharges for travelers checks that often added 5% or more to the cost of getting the currency. Of course, that was still less expensive that ordering currency from home which added at least 10% to the cost.
Managing money while traveling has become easier and more convenient than ever before. But there are now so many options, it can be more confusing as well. This is a series of articles on travel financial issues.
Part I: Getting local currency
Always have more than one way to get cash in a foreign country. For instance, I always have an ATM card and I carry several $100 bills I can exchange if needed. Some people have a few travelers checks as a back up. While you can get a cash advance on your credit card, this should always be the last resort as it is such an expensive way to obtain cash (see below).
People often worry about having the local currency when they arrive at their destination. In my experience, there is always an easy way to get local currency at the airport. At the very least, there is an exchange window and usually, there are a number of ATMs as well as exchange windows. Even if the rate at the airport is not the best (and it is often a good rate), it will be a better rate than you could get outside the country.
In addition to an ATM card, I always carry several US$100 bills as my “emergency” money to exchange when there is not an ATM readily available or it is out of cash. If you are unsure of using an ATM in your (typically) sleepless state as you arrive after a long flight, just exchange some cash – make sure to ask for some small bills to pay your taxi fare.
Exchange Rates
Bureau de Change: Exchange rates are readily available online. You may want to check both a general foreign exchange website like www.xe.com as well as the website of a local newspaper. In most parts of the world exchange windows have had to become competitive, so the differential in rates has become smaller and smaller. It’s easier than ever to get a fair exchange rate. Large bills, US$100 or 100 Euro or Pound notes get the best rates. Notes should be crisp and unmarked.
Travelers Checks
Some people like the security of using travelers checks. If they are lost or stolen, they can be replaced. Travelers checks incur a charge to cash them, sometimes a minor charge, sometimes more. Many places (stores, etc) will not cash them, so bank or exchange windows are often your only options. In some countries one type of travelers check is preferred, and I’ve even heard of people being entirely unable to cash certain types of travelers checks. So travelers checks are not as convenient as they once were.
ATMs
ATMs are the most convenient way to get local currency in a foreign country. Sometimes they are also the most economical. By using the ATM, you get the bank-to-bank exchange rate, which is the best available rate. However, the bank adds a premium to this, usually ranging from 1-3% of the amount exchanged. At 1%, you usually will match or even beat the beast rate available for exchanging cash; at 3%, you’ll get a better rate for cash so you are paying a bit for the convenience.
But there may be other charges as well. You bank may add a per use fee for using foreign ATMs. This typically ranges from $1 – $5. The foreign ATM may also charge a fee, up to $3 or $4 per use. Some banks reimburse any fees charged by the foreign ATM; others do not. So the worst-case scenario is that you might be charged $5 by your own bank, $4 by the foreign bank, plus 3% of the amount exchanged.
If you are only withdrawing US$100 worth of foreign currency, you’ve just paid $12 or 12% for the use of the ATM. On the other hand, if your bank does not charge for use of a foreign ATM and reimburses any charges by the foreign bank, and only charges a 1% premium on the amount exchanged, you are getting the best rate possible. Always know what your bank charges before using your card in an ATM!
Another pitfall to watch out for is to make sure you know what kind of transaction you are making at an ATM. Usually, we think of taking money out of an ATM as cash coming directly from a checking account or a savings account. But you can use a credit card to get a cash advance at an ATM. This is probably the most expensive way to obtain cash, as you are charged an immediate cash advance fee (often 4%), plus any ATM fees, plus a premium on foreign exchange (usually 3%) plus interest beginning the moment you make the withdrawal – at rates higher than your credit card rate, often in the 20-25% range!
Note: If you want to be able to use foreign ATMs, you MUST inform your bank of where and when you are traveling. Otherwise, your bank will likely turn off your ATM access when it sees a foreign transaction. Make sure you have a 24-hour phone number at which you can call your bank collect from a foreign country in case you have a problem getting cash form an ATM.
What about using US dollars in foreign countries?
Some people wonder whether they can’t just bring lots of US dollars and use those instead of exchanging their dollars for foreign currencies. Pause and think about this… does your grocery store accept Euros or Hong Kong dollars in payment? How happy would a taxi driver in Chicago be to accept Thai baht or Malaysian ringgit? While sometimes merchants in say, Vietnam, will accept US dollars in payment; remember that they incur the expense of exchanging the dollars.
A street merchant may be willing to accept the dollars or may even quote prices in dollars if it will get them a sale that would otherwise have walked away. But the merchants need the local currency to transact their own business. I consider it more respectful to use the local currency. Prices quoted in dollars in foreign counties are higher than what you would pay in the local currency.
There are several exceptions I know of in regard to using the local currency. Several central and South American countries have independently adopted the US dollar as their legal tender: Panama (used along with the Panamanian Balboa), Ecuador and El Salvador. Several Caribbean Islands and several islands in the south Pacific also use the dollar. East Timor also used the dollar.
In Cambodia, the US dollar is the preferred currency for everything except small purchases. For a traveler in Cambodia, probably the only Cambodian riel they will handle will be small change they receive for purchase made in US dollars.
There was a time when the US dollar was king. People in foreign countries, especially those with non-convertible currencies wanted US to protect the value of their savings. So it was often to your advantage to exchange money on the “black market” to get a better rate. Those US$100 bills became someone’s savings account. This is no longer the case.
Special note
Some currencies are not convertible: Vietnamese Dong, Lao Kip, Cambodian Riel, Nepal Rupees, Indonesian Rupiah for instance. This means that they cannot be exchanged for hard currencies at official exchanges outside the country, so are effectively worthless outside the country, Also, it means the currency is not officially obtainable outside the country. While you might run into a traveler willing to pay you for your leftover currency, plan to spend or donate it before you leave.
