Should you pay a credit card in foreign currency?

Should You Pay in Foreign Currency on Your Credit Card? A Resounding No.

Traveling can be exciting, but hidden fees can quickly dampen the experience. One sneaky culprit often lurking beneath the surface is the “dynamic currency conversion” (DCC) offered when using your credit card abroad. This seemingly helpful option allows you to see the charge in your home currency at the point of sale. However, while appearing convenient, it almost always comes at a steep price. The short answer is: never pay in your home currency when using a credit card abroad. Opt for the local currency instead.

Here’s why:

• Hidden Fees: DCC allows the merchant or ATM provider, not your credit card network, to set the exchange rate. This rate is almost always less favorable than the one your card network would offer, sometimes significantly so. They bake in a markup, often around 3%, but potentially as high as 6% or more, effectively adding a hidden fee to every transaction.

• Loss of Control: By choosing DCC, you bypass your credit card network’s exchange rate and forfeit any purchase protections they might offer. You’re essentially giving up control over the conversion process and accepting a potentially inflated price.

• Double Conversion: In some cases, opting for DCC can lead to a double conversion. Your home currency might be converted to a third currency (often US dollars) and then to the local currency, incurring fees at each step. This further erodes your spending power.

• False Sense of Security: While seeing the charge in your home currency might seem like it helps with budgeting, it actually obscures the true cost. You’re better off tracking your spending in the local currency and letting your credit card statement reflect the actual exchange rate applied by your network.

The Better Way: Embrace the Local Currency

The most cost-effective way to use your credit card abroad is to always pay in the local currency. Combine this strategy with a credit card that doesn’t charge foreign transaction fees (typically around 3%), and you’ll maximize your savings. Many travel rewards cards offer this perk.

How to Avoid DCC:

• Choose “local currency” at the point of sale: When making a purchase or using an ATM, always select the option to be charged in the local currency. This might be displayed as the currency code (e.g., EUR, GBP, JPY).

• Be vigilant at ATMs: ATMs are particularly notorious for pushing DCC. Carefully read the on-screen prompts and decline any offer to convert the currency.

• Inform the merchant: If a merchant tries to steer you towards paying in your home currency, politely but firmly insist on paying in the local currency.

By understanding how DCC works and taking these simple steps, you can avoid unnecessary fees and make the most of your travel budget. Enjoy your trip and your savings!