Gone are the days of cashing travelers checks or going to an exchange bureau when traveling abroad. All you really need today is a credit card, to use directly for purchases or to get cash if that’s the only accepted form of payment.
However, while the use of credit and debit cards makes life so much easier when traveling, there is one question I often get asked: whether to pay in local currency or US dollars when the option is offered?
Intuitively, you may think USD, as that’s what your credit card holder will charge you. However, it is always better to choose the LOCAL currency.
Following is an explanation we found from Caroline Morse Teel, Managing Editor for Smarter Travel Media LLC.
Currency Conversion Fees
When you make a credit card charge abroad, you’re going to eventually have that charge converted back into USD, either at the point of sale or back at home by your credit card company for your final bill. The difference is that if you opt to convert immediately, the merchant will charge you an additional Dynamic Currency Conversion (DCC) fee―on top of any foreign transaction fees charged by your credit card. The DCC is usually around 1 percent of the transaction.
Additionally, the currency exchange rate charged at the point-of-sale is often significantly worse than the one that will be used by your credit card company. One European study found that converting a purchase at the time of sale can result in exchange rate markups of 12 percent compared to the standard exchange rate. Large credit card networks (like Visa or Mastercard) generally negotiate a very good exchange rate, and so you’re always better off having your credit card do the conversion rather than the merchant.
Foreign Transaction Fees
You might think that you’re dodging the foreign transaction fee charged by many credit cards if you’re converting to USD at the point of sale, but credit cards still consider a transaction made abroad (no matter what the currency) to be a foreign transaction, meaning you still get hit with the fee, which is often around 3 percent of the purchase price.
You should definitely have a credit card that doesn’t charge foreign transaction fees, even if you only use it when you’re abroad. There are many travel-themed credit cards that offer no foreign transaction fees out there.