It’s that time of year when people across the nation pack their bags and head off on holiday abroad.
As a consumer rights journalist and broadcaster, it’s a busy time of year for me too. I’ve spent the past few months appearing on television and radio talking about holidays, consumer rights and how to avoid travel traumas. I’ve also written a number of my national newspaper columns about this subject too.
One of the most common questions that I get asked about is how to make the most out of your travel money. In particular, people want to understand how exchange rates and fees work when paying for goods or services in a foreign currency.
So how do you know if you’re getting the best exchange rate? If you look online then you’ll be none the wiser about how to measure this. To add to the confusion, there are a range of different online currency services and options that aren’t exactly up front about the fees and mark-ups they charge when you spend your cash abroad.
I find the claims of some of the ‘challenger banks’ (the new, online-only businesses that offer banking services and debit cards) particularly confusing. Many claim to offer the best exchange rates available. But all is not always what it seems…
I’m a great believer in keeping things simple! So let’s look at the two main rates that are often mentioned as ‘the best exchange rates’.
The card scheme rate
This is an exchange rate for foreign currencies which is set each day by the big card service providers, like Visa and Mastercard. This rate is ‘fixed’ which means it stays the same throughout the day. But because the rate doesn’t fluctuate, you lose the opportunity to get more advantageous exchange rates.
The interbank rate
This rate is considered to be the ‘gold standard’ in the industry. That’s because the interbank rate fluctuates constantly, tracking in real time what the value of each foreign currency is. As a consequence, using the interbank rate generally gives you the best value as you spend abroad.
What about fees?
Many firms advertise their cards as being ‘fee free’ – but as is always the case, the devil is in the detail. Research commissioned by Currensea has shown that the card scheme rate can typically be over 0.5% above the interbank rate. So customers of those "fee free" challenger banks and credit cards are still paying that mark-up.
It's one of the reasons why I like Currensea - they are completely up front about the 0.5% mark up on the interbank rate that they apply to transactions. It means they typically provide a similar price to "fee free" banks, while allowing users to know exactly what they are paying as they spend.
You can find out more about the hidden markups and fees for different providers elsewhere on the Currensea blog, including those references to the sneaky T&Cs that can lead you to incur fees – particularly if you withdraw cash.
As for the high street banks, fees on each transaction alone can be as high 3%! You also receive a less advantageous exchange rate too – and this isn’t usually applied at the point you pay. In fact this may take place some time later. Finally, an additional currency conversion fee can sometimes be applied to the transaction too, making traditional bank debit card spending bad for your bank balance when spending on holiday. Using your high street bank’s debit card during a 2 week holiday to Florida could cost you over £400 in exchange rate losses alone!
Credit cards can sometimes seem to give you a better exchange rate… but standard cards apply fees on what you spend too. There are some specialist travel credit cards that don’t do this, but the APR rates on these cards can be eye-wateringly high. So if you don’t pay your bill on time, you could end up paying a fortune in interest.
There are also other fees and charges you need to consider before using debit, credit and pre-paid travel cards. Here’s what to look for:
- Cash withdrawal limits and charges.
- Top up fees if you’re using a pre-paid card.
- Charges if the card provider isn’t your primary bank account (the one your money is generally paid in to).
- Fees for replacement cards.
- Excessive interest rates on outstanding balances.
Knowing that you are getting the best, fee-free rates when enjoying your holiday can really take the stress out of travel. So do a little research before you board the plane. The money you save in exchange rates and fees could pay for an extra night in a five-star hotel for you and your family… or a final day blow out!
