Travelers Should Always Pay in Local Currency to Avoid Dynamic Currency Conversion Fees
If you've ever traveled abroad and paid for something by credit card, you've almost certainly been asked "would you like to pay in [local currency] or [your home currency]? For example, if you're in Europe and using a credit card issued in the United States, you'll probably be asked if you want to pay in US Dollars or Euro. I know the correct answer here is probably obvious to most OMAAT readers, but it amazes me how often people get this wrong. Simply put, you should just about always pay in local currency, or else you're typically just throwing money out the window. In this post, I'd like to take a closer look at the topic of dynamic currency conversion. What is dynamic currency conversion (DCC)? Dynamic currency conversion is essentially a "service" provided by credit cards and payment networks that gives card members the option of paying in their billing currency rather than the local currency. In other words, if you're in Europe, you'll likely be billed in Euro, even though that may not be the currency in which your credit card bills you. The same principle applies at ATMs. If you're trying to withdraw Euro, you'll be asked whether you want to just withdraw that number of Euro at the standard exchange rate, or whether you want that amount converted on the spot, so that you know exactly how many US Dollars your account will be debited. What are the benefits of dynamic currency conversion, whereby your purchase will be converted to your billing currency on the spot? Well, it guarantees the amount that you'll pay in your billing currency, regardless of any exchange rate fluctuations. Furthermore, it provides transparency as to how much you'll pay in your billing currency, especially if you're not great at math and/or don't know the exact exchange rate. When some people are asked whether they want to pay in their home currency or the local currency, they might think "oh, how nice that they're willing to convert it, that's convenient." However, there's a major catch. Understanding dynamic currency conversion is important when abroad Should you use dynamic currency conversion? Please, please, please, don't use dynamic currency conversion, because it's almost never a good deal. I don't want to go so far as to say it's a scam, because there's generally quite a bit of transparency around it, and you're just being given two options. However, it's kind of like asking someone "hey, do you want to buy a $100 gift card for $110?" Um, no, why would anyone want to do that? For example, often when you go to an ATM that provides bills of a different currency, you'll be asked if you'd like to perform the transaction in your home currency (which for me would be US Dollars). No matter how you choose to do the transaction, there may be a transaction fee (in the below case it's €3.95), which is standard (though many banks reimburse this). Then you might be given the option of having something debited from your account (in Euro) at the standard exchange rate, or you can instead be debited an amount in USD with a 12.95% conversion fee. Dynamic currency conversion is sometimes offered at ATMs Of course you should decline that, so that you just end up paying the actual conversion rate (then the terminal fee is billed separately). My Chase transaction showing ATM withdrawal So in the above case, the question literally comes down to whether you'd rather pay $254.89 or $225.67 (before the fee reimbursement, in my case) for 200 Euro. I know which I'd pick. 😉 If you're using credit cards, the dynamic currency conversion fee typically isn't quite as much. It varies depending on the payment processor, merchant, etc, but is more likely to be in the range of 1-5%. Why does dynamic currency conversion even exist? If dynamic currency conversion is almost universally a bad deal, why is it even offered? Well, I think the answer is pretty obvious. Take the above ATM example, where there's a 12.95% markup. I am sure a not insignificant number of people select that option, so there's more money to be made this way. That money primarily goes to financial service providers who market the dynamic currency conversion system, but also to merchants and ATM operators, who receive a commission on each transaction carried out via dynamic currency conversion. Now, fortunately a vast majority of merchants are pretty ethical, and will just give you the option of which you want (as they're supposed to). However, every once in a while you might run into a merchant who either by default charges you in your home currency using dynamic currency conversion, or who claims it's a better deal. That's highly unethical, of course. Merchants profit off of dynamic currency conversion How do credit card foreign transaction fees fit into all of this? If you travel abroad you absolutely should have a credit card with no foreign transaction fees . You don't need to be a high roller to get one of these cards — there are even lots of great no annual fee cards that don't have foreign transaction fees. If you use a no foreign transaction fee credit card abroad, just decline dynamic currency conversion (meaning you should pay in local currency), and you should get your purchase converted at a pretty fair exchange rate. What happens if you use a credit card that does have foreign transaction fees? These fees are typically somewhere around 3%. Foreign transaction fees are normally based on the currency in which you make a purchase, rather than the country in which you make a purchase. In other words, accepting dynamic currency conversion at the point of sale would potentially allow you to avoid these fees. However, the fees associated with dynamic currency conversion are often more than 3%. Really the moral of the story is that you should have a card with no foreign transaction fees, as you're otherwise going to lose a few percent on each transaction, potentially, and that quickly adds up. It's important to have a card with no foreign transaction fees Bottom line Dynamic currency conversion is something that you'll constantly deal with when making purchases in a foreign country. Your takeaway should be that you should always choose to be charged in the local currency rather than your home currency, regardless of whether you're making a credit card transaction or withdrawing money from an ATM. Furthermore, make sure you have a credit card with no foreign transaction fees. It amazes me how often I see well traveled people use dynamic currency conversion, despite paying with a card that has no foreign transaction fees. Don't make that mistake. See my post on how to exchange foreign currency efficiently . Is anyone else surprised by just how many people seem to use dynamic currency conversion?