For the first time this year I shall not be taking travellers cheques with me on holiday abroad. I will take a bit of cash and use plastic just like I do at home. And when I run out of cash – as I always do – I shall get some more out of a cash machine. Using plastic abroad can end up cheaper than buying and taking out cash and traveller’s cheques.
When you buy foreign currency in the UK you are charged twice for converting it. First, the bank will charge commission – usually 2% though there can be a minimum of as much as £3, so if you change less than £150 you will pay a higher percentage. But it is the second, hidden charge that is the most expensive. This is the ‘spread’ or the difference between the price the bank pays pay when it sells you currency and the price it will pay when it buys it back.
For example, on one day in May this year Barclays Bank was buying US dollars at $1.5145 to the pound and selling them at $1.3774. That is a spread of around 9.5%, or about 4.75% each way. With the 2% commission that makes nearly 7% for changing your money into dollars. The spread on dollars is lower than that for other currencies and many foreign exchange bureaux charge more than Barclays. So the chances are you will be paying at least 7% to buy your currency. In other words, you give them £100 and they give you back £93 worth of dollars, francs, or pesetas. And if you bring some cash back, do not be fooled by those ‘commission free’ offers to change it back into Sterling made by some exchange bureaux. You will still be charged the spread so they can keep another 5% of your money.
These charges mean that it is usually cheaper to draw cash out abroad. You can use your debit card to take money out of cash machines abroad as long as it has the Visa or Cirrus symbol on it. You will usually be charged at least twice. First, there is a charge called the ‘Foreign Usage Loading’. If you ask your bank, or look it up in a magazine like MoneyFacts, you will see it can be as much as 2.75%. You never see this charge, it is simply incorporated into the rate of exchange they use which will eventually appear on your bank statement. But because Visa and Europay – owners of Mastercard – trade billions of pounds worth of currency each day, the rate of exchange they get is usually very good and even with the extra 2.75% charge, you get may still get a better rate than when you buy foreign currency in the UK. Some banks charge less than the standard 2.75% for using your card abroad and Nationwide, the building society, charges nothing. So it is worth checking and, if you use your card abroad a lot, moving to a cheaper bank. The same Foreign Usage Loading is used if you use your debit or credit card to buy goods in foreign currencies.
Second, there may be a cash handling charge, normally another 1.5%, though some charge less and Nationwide, again, charges nothing. In addition, you may find the bank which owns the machine will charge for using it, particularly in the USA. American banks are renowned for what customers there call ‘nickel and diming’ them at every opportunity.
If you use your credit card to draw out cash then there will a further cost as most of them charge you interest from the day you make a cash withdrawal. Even if you pay off your card as soon as you can, it will add another one or two percent.
Despite these charges, convenience wins for me. And before I leave I shall be checking that I have my tickets, passport, plastic and, in my head, my PIN.
You can read the Money Box holiday cash survey at here
16 June 2001
e-mail Paul Lewis on paul@paullewis.co.uk