I recently returned from a trip to Australia and I was reminded of one of my biggest annoyances of using a card abroad: dynamic currency conversion.
If you are traveling abroad, be wary if you are asked to process a credit charge in U.S. dollars. If you say yes, you’ll almost certainly be charged a poor exchange rate. It is almost always better to process credit card charges abroad using the local currency.
What is dynamic currency conversion?
Dynamic currency conversion allows you to pay in either local currency or in your home currency when using a credit card abroad. For credit card users from the U.S. traveling abroad, this means an option to process a charge in U.S. dollars.
A merchant can offer dynamic currency conversion when you pay for a purchase at a point of sale. Some banks also offer DCC when you take cash out of an ATM.
When you use DCC, the merchant sets the exchange rate. Sometimes you will see the exchange rate they use. Often it will be hidden. But rest assured that it always includes a hefty markup. If you opt to pay in U.S. dollars, chances are you are paying a premium of 5-7% for the privilege.
Should I pay in local currency or U.S. dollars?
Using dynamic currency conversion and paying in U.S. dollars is almost always a bad deal. You’re accepting a hefty surcharge in exchange for certainty in exchange rate.
If you choose to process a credit card charge in local currency, the exchange rate you receive will be close to the inter-bank exchange rate. Some processors use the rate on the date you swipe your card for the conversion. Others use the date your transaction is settled. In either case, the amount you end up paying in your home currency will vary slightly. While dynamic currency conversion give you certainty about which exchange rate will be used, a 5-7% markup is a hefty premium to pay.
Some blogs incorrectly state that Visa and Mastercard both charge a 1% foreign currency conversion fee. They suggest that DCC is a way to get around this fee. This information is outdated and incorrect. Both Visa and Mastercard allow you to see what rates they use to convert foreign transactions on their website.
Can I avoid a foreign transaction fee by paying in U.S. dollars?
If your credit card issuer charges a foreign transaction fee, you won’t be able to avoid this fee by paying in U.S. dollars. Foreign transaction fees apply even if you are charged in U.S. dollars in a foreign country.
If you are on a trip abroad and asked if you want to pay in U.S. dollars or local currency, don’t be fooled. Processing your credit card charge in local currency is almost always cheaper.