When you are paying for something abroad, sometimes you are given the choice of either paying in the local currency or having the transaction take place in dollars using your credit or debit card.
What should you do?
The advantage of paying in dollars is you can immediately see what the item will cost. The disadvantage is that it might turn out to be more than you would have paid in the local currency.
When you pay in the local currency, as well as taking into account the rate of conversion as applied by your credit or debit card provider, you may also have to pay a foreign transaction fee, which will then be added into your costs.
What happens when you use your card abroad?
When you buy something (or withdraw cash) abroad in the local currency, it will be subject to the exchange rate the banks apply and, in addition, a foreign transaction fee will probably be levied. This fee will depend on the card you are using. (Some cards do not charge fees for foreign transactions, although this may be part of a limited-time promotion or the card may charge an annual fee.)
Both the transaction in the local currency and the foreign transaction fee will be converted into dollars based on the exchange rate the day your transaction was processed. The exchange rate can fluctuate day to day depending on supply and demand in the currency markets.
The two dollar amounts are then added together and divided by the original currency payment amount to work out the applicable exchange rate. Simple, huh?
how does it work?
For example, you travel from the US to, say, Paris, and buy something nice for your significant other back home. You spend €100 using your credit card. On the day the transaction is processed, the daily exchange rate is €1 = $1.16074. So your purchase is converted from €100 to $116.07. In addition your bank charges you a 1.60 percent transaction fee on the $116.07, which comes to $1.86. Add together the purchase and the fee, for a total of $117.93, and then divide that by the original €100 purchase amount to work out the new exchange rate (which includes the foreign transaction fee) – €1 = $1.1793. Your credit card statement will simply show the original charge and this new exchange rate.
What is Dynamic Currency Conversion and should I use it?
Dynamic currency conversion is the term used for paying in your own currency, dollars. Paying in dollars makes the price you’re paying clearer and means you don’t have to pay the foreign transaction fee (1.60 percent in the example above). But the retailer may still be charging you a conversion fee, and the exchange rate – set by the retailer – will almost certainly not be as competitive as the ones set by Visa or American Express – so paying in dollars could end up costing you more – in some studies as much as 10 percent more.
What should you do?
Check the current exchange rate on credit cards, which is reset daily by Visa or American Express. Failing that, just say no – and insist on paying by card in the local currency. You will still pay the rate of the day plus the foreign transaction fee (unless you have a card that waives this fee, such as the Capital One Venture Rewards Card or Chase Sapphire Preferred), but you will not be blindly shelling out even more for what is a substantially worse exchange rate.
When is Dynamic Currency Conversion a scam?
It’s a scam when you’re not given a choice to pay using it; you have the right to ask! For instance, when settling the bill in a restaurant, check that the conversion has not already been made when the point of sale machine has recognized your card as “foreign.”
You can insist on paying in the local currency, no matter what the retailer, hotel or restaurant says, but you may later see a voided transaction on your bill.
Further, it is often a scam because it relies on “knowledge asymmetry” – namely that we are unable to easily and quickly assess the overall extra cost of paying in dollars rather than the local currency. To learn more: businesstraveller.com/forums/topic/dynamic-currency-conversion.