Think like an economist when you travel abroad to save money

Think like an economist when you travel abroad to save money

You will need local currency when you travel abroad, like euros in Europe, rubles in Russia, or yens in Japan. In the past, travelers would usually withdraw the money they needed from an ATM located in the country that they were visiting or use their credit card. Their bank would then calculate the cost of the transaction in their currency at the current market rate. It was also common to charge a fee for foreign transactions.

Companies, restaurants, and ATMs offer travelers the ability to withdraw or pay in their currency. Companies that provide this service refer to it as ” dynamic currency conversion.” An American tourist visiting Paris, for example, can use her credit card in lieu of euros to pay for an expensive meal at a French restaurant.

It may seem convenient or innocuous, but using your currency when you’re abroad can increase the price of everything. Avoiding this error by thinking like an economist will save you a lot of cash.

Two tourists hike in Sri Lanka. Reuters/Dinuka Liyanawatte

Tourists are on the rise.

In the past, international travel used to be reserved for only the wealthy. Today, anyone living in an industrialized nation can travel the world for a reasonable price.

Although people complain about “high” airfares, the truth is that the cost has never been cheaper or safer.

This is one of the reasons why, in 2016, a record 1,24 billion people traveled to another country. Financial firms have tried to take advantage of all the wandering by devising new ways to steal travelers’ hard-earned cash.

Buy things overseas

Tourists use credit, debit, or ATM cards for hotel stays, meals in restaurants, and buying local souvenirs.

A complex computer network that spans the globe checks the validity of a card and then transfers the funds. To help cover this cost, banks and card companies charge customers a fee for foreign transactions.

It can be expensive to use an ATM for currency exchange. Reuters/Rafael Marchante

Banks are now offering cards that have no fees for foreign transactions. In the meantime, there are “free ATMs ” popping up all over the world. These ATMs don’t charge any local transaction fees.

How can banks afford to cover these costs if they’re allowing consumers to use the system at no cost? The option of paying in the user’s currency is one way to do this. Some bankers warn consumers against doing this because the exchange rate is worse than what your bank offers.

Say you are a Spaniard in New York City, and you shop for clothes at a department store. You’ve spent hours searching for the perfect sweater for your mom, and you finally find it. Now that you have the right sweater in hand, you head to the cashier for payment. The cashier will ask you if you would like to pay with euros rather than dollars after you swipe your Spanish card, which has no foreign transaction fees.

If you choose to pay in dollars, the bank will convert it into euros at the current market rate of EUR43. The currency conversion fee is ten percentage points if you decide to pay in Euros. You could end up paying EUR47 instead.

It’s the same with ATMs. Last year I needed British pounds at Heathrow Airport in London. In the past, the ATM would offer me a few denominations, give me money, and then my bank would convert to U.S. Dollars. The airport ATM instead asked me if I wanted to lock in my exchange rate so that I knew exactly how much money would be deducted from my account.

I tried two ATMs and wanted PS100. The dollar rate was almost 4 to 10 percent higher than the bank’s (or $134 to $142). I declined both offers and did the transaction using the local currency. My bank charged me $129 for the total.

Many international travelers have made this choice. I’ve seen an Italian family argue about it at the ATM next to them, and the majority chose dynamic conversion in their currency.

Why do travelers pay more when they accept a lower exchange rate when they could say no?

The ATM at Heathrow Airport suggested that I withdraw British pounds, but instead debited my account in U.S. Dollars. It would have charged $1.42 for each pound or 14 cents more than the current market rate. Jay Zagorsky, CC BY-SA

Three functions of money

Economists will consider any item to be currency if it fulfills three different functions: unit of account and store of value, as well as a medium of exchange. Two of the three reasons why international travelers behave in a certain way are explained by two out of three.

Money has two functions. The first is to serve as a unit for an account. This is the way people keep track of and post prices. It is for this reason that banks and credit card companies encourage people to pay with the currency of their home country instead of local money.

People who travel to countries with different currencies often keep track of all their purchases in their heads, using the money they are used to. They convert prices as they go shopping and eat. When an ATM or credit card terminal asks you if you’d like to pay in the currency that you use for your account, your mind says yes.

Money can also be used as a value store. Money can be used to purchase goods now as well as in the future. Travelers who don’t plan to return to a particular country often spend their leftover money at airports on things they do not really need. Since foreign bills aren’t a good investment, they don’t like to keep them. They also prefer to have their ATM withdrawals charged in the currency they are used to.

Money is also a medium of exchange. This is anything that is readily accepted as payment for goods or services. When traveling abroad, people must convert their money. A dollar bill can be used to pay for food, drinks, or subway rides in New York City. In China, for example, waving greenbacks will only get you stares. Travelers must exchange money between currencies.

Pedestrians pass an electronic board that displays currency exchange rates in the Buenos Aires financial district. Reuters/Agustin Marcarian

Save money when traveling abroad.

If you are asked to convert your currency at an ATM or credit card machine, it is best to decline. This is especially true if you’ve gone to great lengths to make sure you have a card that doesn’t charge any extra fees for foreign exchange . If you don’t, but your credit card has a price attached, it is still advisable to use local currency.

This rule is only broken if you have a credit card or bank that charges a high foreign exchange rate and needs a small amount of money. Saying yes, in this case, could save you money, even if the exchange rate is poor.

It’s important to think it through. You may be tempted to say yes because you are comfortable, but resist this urge. Do not be swayed by the question of whether you would like to purchase your currency. You can save money by using the local currency on your next overseas trip.

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