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The Smart Guide to Foreign Exchange

in Travel Money

Whenever you change money between currencies you lose money. Not very smart.

Our advice on foreign exchange is about damage limitation and helping you get the most from your travel cash. Believe it or not it’s actually possible to make money transferring cash between currencies- there’s a whole subset of investor who make a mint trading on the forex market. The problem with foreign exchange comes when you want to turn your money into physical cash (or goods) because in simple terms you need someone who has cash in the local currency to make the trade. They charge commission and offer an exchange rate which is lower than the actual like for like conversion because they’re offering a service.

In theory the best thing you can do is keep and use as little foreign cash as possible although this isn’t always practical. The alternative is spending on a credit or debit card although if you’re not careful this can actually be more expensive. See our advice on using credit cards and debit cards abroad for more on this.

Assuming you’re going to need some travel cash there’s a few routes you can go down:

  • Buy foreign currency at home online and get it delivered.
  • Buy foreign currency at a travel agent or a foreign exchange counter at places like Tesco and Marks and Spencer
  • Draw cash out at ATM’s on arrival

You can also consider travellers cheques for part of your travel cash, although you’ll probably still want some cash for arrival. See our advice on travellers cheques for more on this.

If you take one thing from this article make it this:

Do not under any circumstance change money at foreign exchange booths at the airport.

Getting the best deal on foreign exchange

As with most of the travel money products we talk about on this site the key to getting the best deal is being as prepared as possible and make arrangements early. For the most part ordering currency online for home (or work) delivery is the cheapest and most convenient option although you’ll need to make arrangements before you travel. The next best option is to seek out the best exchange rate and lowest commission on the highstreet. The worst deal is usually at the cash machine. As with most things in life the early, organised people get the best deal while the rest of us pay a premium for our disorganisation!

Before we go any further there is a big caveat with foreign exchange cash. You should think carefully before changing up and carrying more cash than you’re insured for under your travel insurance policy. This amount varies from policy to policy but the average seems to be £200 per person. That’s not a huge amount if you’re on a family holiday. Obviously the decision is with you here but bare in mind any cash you’re carrying over the payout limit on your travel insurance you will lose entirely if you get robbed. See our travel cash safety tips for more on keeping your money safe.

Buying foreign exchange online

Several companies offer online ordering of currency with home delivery. The main reason to use this service is the convenience. By ordering online you can easily compare current rates and buy when your pounds are strongest against the currency you’re buying. If you end up paying commissions or delivery charges on top of your cash any savings will usually be wiped out so if you’re using one of the services below make sure you qualify for free delivery.

Buying at travel agents

Foreign exchange shops are the traditional, and still most popular, way of buying currency. The advice here is simple- look for who’s offering you the most end currency for your sterling at any given time and exchange your cash there.

There’s 2 things to look out for – the exchange rate and the commission. Exchange rates fluctuate between foreign exchange providers, usually minimally, but every penny counts. Commission is usually a fixed amount the exchange counter charges for the service. Needless to say the lower the commission the better. Remember no foreign exchange provider offers the service for that warm, fuzzy feeling they get when they give a great deal to customers. If the commission is low or nil the provider is still earning on the exchange so pay extra attention to the rate they’re giving you. You can see the actual market rate for any currency exchange on x-rates.

Foreign exchange at the cash machine

Although foreign currency might come out the hole in the wall the best way to look at overseas ATM withdrawals is just like any other foreign exchange transaction, except you don’t get the benefit of shopping around for the best exchange rate (or even seeing the rate you’re getting in most instances). When you draw cash from your bank overseas the money will in affect leave your account in your home currency ie sterling, then be converted into the local currency at the current rate the bank is offering. Like the foreign exchange counters this rate is never favourable. In addition one or more of the following may happen:

  • You get charged a commission by your bank in the form of charges
  • You get charged by the bank or company who owns the cash machine (although they should tell you before doing this)

Despite the financial drawbacks withdrawing cash from the ATM during your holiday is safer than travelling with all your spending money in your wallet before you leave. For most travellers our recommendation would be to change enough before leaving home for 3-4 days then aim to use the ATM no more than once for the first week then no more than twice on subsequent weeks of travel.

Above all else you should minimise the cost of withdrawing cash by seeing our advice on the best current accounts for overseas cash withdrawals.

A note on credit cards

Withdrawing cash on a credit card is about the biggest personal finance faux paux you can make. Combining this with a foreign exchange transaction is like a molotove cocktail of bad money management! When you withdraw cash on a credit card you’ll usually be charged a cash advance fee for the pleasure then an extortionate APR on the total, in many cases up to 30%.  If you pay off the balance each month you’ll get away with just the cash advance fee, the exchange commission and the crap exchange rate.

If you use your credit card to buy foreign currency at the travel this will be treated as a cash advance, exactly the same as if you went to the cash machine.

The details are a little complicated but the advice is simple – don’t withdraw cash on your credit card. Don’t buy foreign currency with your credit card. The exception to this are pre-paid currency cards which are designed to be used in this way.

Pre-paid currency cards for travel money

You can read more about the in’s and out’s of currency cards on our full guide to using currency cards for your travel money. Here we will just discuss the use of pre-paid cards with regards to foreign cash withdrawels.

Currency cards should offer a better exchange rate and lower ATM fees than you’d expect to pay on most current accounts or regular credit cards. In fact withdrawing cash on pre-paid cards is their main function, other purchases can usually be made more cost effectively on regular credit cards with cash back offers.

Currency card companies make money by charging ATM access fees which are set amounts per withdrawel. They also make money on the exchange rate although competition between providers means these exchange rates tend to be more competitive than the banks who have no incentive to give you a good rate. Access fees are lower than most bank charges for overseas withdrawels and are fixed per transaction rather than being a sliding %. This means you should get out chunks of cash rather than taking out a tenner here and there. If you’re in a group or couple it’s worth getting one currency card between you and splitting the cash, and the fees in the process.

See our currency cards section for the best deal.

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