When it comes to travelling, dynamic currency conversion is something you need to know about since it’s one of the biggest travel fees you can avoid. In case you’re not familiar with dynamic currency conversion, it’s when you get the option to pay for your purchases in your home currency when using credit cards abroad.

This is a convenient practice since you’ll be able to see exactly how much you’ll pay for your purchases, but you actually end up paying more for the convenience. The reason this happens is that merchants set the exchange rate for foreign currencies whereas the local currency exchange rate is set by your credit card processor.

To be fair, merchants don’t usually mark up the exchange rate by much, but why pay more than you have to? Keep reading to learn more about how exchange rates work when you make purchases in a foreign currency and how you can avoid dynamic currency conversion fees.

dynamic currency conversion

Understanding exchange rates

First off, you need to understand that the exchange rate you see on the news or online at xe.com isn’t the exchange rate that’s available to everyone. That’s known as the ‘interbank’ or ‘mid-market’ rate which you would never get since banks will always add fees or a margin so they can make money. The exchange rate you get when paying with your credit card is set by your credit card processor. For example, here were the exchange rates of 1 U.S. dollar to Canadian on March 15th, 2019.

  • Official rate: 1.3343712549
  • Visa rate: 1.335266
  • Mastercard rate: 1.337034

As you can see, the official rate will always be the lowest. The rate listed from Visa and Mastercard is what you would pay, plus and foreign currency fees that your credit card charges.

Foreign transaction fees on credit cards

That markup that your credit card processor charges isn’t the only fee you’ll pay since the majority of credit card providers also charge an additional 2.5% when you make a purchase in a foreign currency. This isn’t a huge amount, but it can obviously add up pretty quickly.

The good news is that there are quite a few credit cards that don’t charge you foreign currency fees. That means when you use a card as the Scotiabank Passport Visa Infinite card or the Home Trust Preferred Visa, you would just pay whatever the Visa exchange rate is on the date that you make purchases in a foreign currency.

Always pick the local currency when paying

With this information in mind, you should now understand why picking the local currency will always give you the best exchange rate. In case you’re confused, it’s because your credit card processor sets the exchange rate as opposed to the merchant so it’ll always be closer to the actual exchange rate.

Yes, you could potentially be charged that 2.5% exchange fee that I just mentioned, but that’s why you want to ensure that you have a credit card that doesn’t charge you foreign transaction fees. It’s important to note that this fee is only waived when you’re actually paying a foreign currency. That means if you chose to pay in Canadian dollars while abroad, you would not get any fees waived since you’re not paying in a foreign currency.

What about cash?

Oddly enough, dynamic currency conversion also applies when you pay cash. Some countries accept different currencies, but the best deal is to always pay in the local currency. For example, many countries in the Caribbean accept USD and CAD but you may not get the best rate. The exchange can also vary depending on where you’re spending your cash.

When I was in Barbados, the official currency exchange was 1 USD = 2 Bajan dollars. The majority of places accept this rate, however, I saw a few places where 1 USD was only worth 1.90 or 1.95 Bajan dollars. The same could apply to countries in Europe who don’t use the Euro as their official currency. The odds are that if you use the local currency instead of Euros, you’ll get the best price.

Many people opt to use local ATMs to get cash, but in recent years, some banks have upped their foreign exchange fees to 3.5% when using a foreign ATM. You also need to consider any fees your debit card provider charges to access a foreign ATM, plus any fees that the local ATM charges. As you can imagine, those fees also add up fast.

One solution to get foreign cash cheap is to try the STACK Mastercard. STACK is a prepaid card that doesn’t charge any exchange or foreign ATM fees. That being said, the ATM you use may charge you a one time use. STACK is the cheapest way to get foreign currencies.

Sign up to STACK with my referral link and you’ll get $25 when you activate your card. Keep in mind that you must click this link via your mobile device for it to work.

Final thoughts

When making purchases in a foreign currency with a credit card, always choose the local currency over your home currency if you’re given the choice. Combine that with one of the best credit cards without foreign exchange fees and you’ll pay next to no fees when making purchases.