Wednesday, March 21, 2007

Monopoly Money

[This is going to be one of my rare educational blogs where I provide useful information which I have synthesized from across the vast resources of the Internet.]

It's not often I travel outside the US, so until California falls into the ocean and starts printing its own currency, I don't have to worry much about exchanging money. But as the avid readers of my blog may have inferred, I don't like wasting money, or giving more money to "the man" than I absolutely have to. So on my recent trip to Canada, I examined the several ways to pay using their 'monopoly money' (either cash or electronic), to determine the most fiscally-responsible way to beat the system.

There are three main ways to pay for things internationally, cash, debit card (check card), or credit card. As anywhere else in the world, cash is king... assuming you have the local currency in hand. Once you have it, you're all set. Everyone accepts it, and you don't have to worry any more about exchange fees. But how do you get it? There are several options:

1) Exchange your currency for their currency. This is good, in principle, until you look at the rates. Consumer exchange rates are ridiculously high compared to the wholesale exchange rates banks use. For example, last weekend when I was in Canada, the US dollar had a wholesale rate of about .85USD/CAD, but the consumer exchange rate (what you'll likely pay if you walk in off the street) was over .92USD/CAD, a difference of about 7 cents on the dollar! In the short run for small things, probably doesn't make a huge difference, but in the long run, ouch!

$100 CAD = $92.00 USD

If you really want to have the cash in hand as soon as you arrive, you might consider changing it before you go. At home through your bank or online, you'll have the flexibility to shop around for the best rate. You're still going to be paying the inflated consumer rates though. Non-cash options include pre-paid cards (like Visa Travel Money) you load up with money before you go. Though they sound good in principle, but they kill you with fees. First a fee to get the card, then more fees for using it at ATMs, plus the standard exchange fees when using the card. Still a good option if you need lots of money that's safer than carrying around lots of cash, but if you already have a credit/debit card, I'd stay away from it. As far as Traveller's Cheques go, yuck. You'll pay the exchange rates either when you buy them or cash them, plus who uses cheques anymore? People will look at you funny. Cash is king, remember.

2) Use your US ATM card at their ATM. Depending on your bank, you'll pay a flat International ATM Fee, plus a International Transaction Fee for converting the money. For myself with Bank of America, that adds up to a flat $5 USD for the ATM fee, plus 1% of the USD conversion amount for the transaction fee. HOWEVER, you're taking the conversion at the bank wholesale rate. At a Canadian ATM:

$100 CAD = $85 USD + $5 fee + $0.85 (1% fee) = $90.85 USD

This equates to an actual rate of around .91USD/CAD, still cheaper than I could do converting cash. Fees vary widely among banks, and it's really hard to find the right information short of calling your bank and asking them what their fees are. One added bonus with Bank of America is that they are a member of the Global ATM Alliance, which is an alliance between banks in the US, Canada, Mexico, UK, France, China and Australia/New Zealand, allowing fee-free ATM use among those banks. In Canada, the alliance member is Scotiabank... so I could use my BofA card in one of their ATMs and get cash for only the 1% conversion fee.

$100 CAD = $85 USD + $0.85 (1% fee) = $85.85 USD

This roughly .86USD/CAD rate is far and beyond the best you're going to be able to do internationally to convert cash. [Note: Bank of America is very vague as to whether or not the 1% fee is charged for Global ATM Alliance withdrawals. I'm assuming it is, and it's just the $5 fee that's waived, just since past experience is that BofA isn't up on giving up too much money.]

3) Use your US credit card to take cash out. This is a bad idea in the US, let alone internationally. Most credit cards charge up to a 3% fee for the conversion, plus cash advance fees and instant interest. I won't even bother with the numbers, it's so ridiculous.

Once you have local currency in your hands, you're all set. But make sure you don't convert more than you need, because the only way to get the cash back to USD is to pay the consumer conversion rates I outlined before. Better off saving it for your next trip, or if you're not going back anytime soon, go on a souvenir shopping spree.

But what if you need to pay for bigger things, perhaps a hotel, or other expensive things that you don't want to pay with large wads of cash. Just like back home, plastic is a good option. But again, most people have multiple options here too:

1) Use your credit card. Visa or Mastercard are accepted in all the civilized parts of the world. Your exchange rate will be the wholesale rate plus a fixed percentage assessed by your card issuer. Most banks charge between 1% - 3% for this fee. My Bank of America card is 3% on international transactions:

$100 CAD = $85 USD + $2.55 (3% fee) = $87.55 USD

This is still significantly cheaper than any other option, short of the fee-free ATM that we found above. Card fees vary widely, however. Visa is actually converting the money, and charging the issuing banks 1% to do so, however the banks then "pass the savings on to you" by charging you anywhere from 1-5%. However, some cards, such as Capital One's credit cards, actually absorb the 1% that Visa is charging them, and have completely fee free cards. This means with one of those you would pay:

$100 CAD = $85.00 USD

That's it, just the straight wholesale rate and nothing else. Makes it almost worth it to put one of these cards in your wallet if you are frequently travelling abroad, or plan on taking a long trip.

2) Use your debit/check card. Oddly enough, I found it nearly impossible to find information about this for my BofA card. Some references show this as just the 1% fee, others 3%. As with most of my other data, you just have to try it and look at the numbers to figure it out. Your mileage may vary. Either way, I wouldn't expect it to be any worse than using your credit card, if not better.

In summary, know what you're paying before you go. Ask the right questions to find out the right answers about the fees you'll pay outside the country. Also know where you're going. The guidelines I found really only apply to the industrialized world, and may not apply if you're travelling to the middle of nowhere. As I constantly implore, cash is king, and there's probably few places in the world where you can't use a US greenback. I'd always keep a few dead presidents buried in that secret spot in your wallet in case of emergency. When changing money, everyone's out there to take a piece of the action... make sure they don't take too much of yours.

No comments: