Understanding Currency Conversion Rates

currency conversion_us dollars being exchanged for australian currencyYou’re figuring out how to navigate a new currency, which means you’re most likely leaving the country soon. We’re just a tad jealous.

Technology has changed everything about travel, and currency conversion is no exception. But with all your options—bringing cash to exchange at the airport, using a card in your currency or the foreign currency, or using foreign ATMs—it can be hard to know the best way to exchange your money. And unless you’re an expert in international economics, you probably only have a fuzzy idea of what’s a good currency conversion rate, and how much things should be costing you abroad.

To save you from the perils of a sketchy exchange, we’re decoding currency conversion, rates, and the best way to pay while abroad.

What Is a Currency Exchange Rate?

We’ll start with the basics. An exchange rate is the difference in value between two currencies. When you exchange money, you’re essentially “buying” one currency with the other, and the exchange rate tells you how much each U.S. dollar will get you.

Obviously, visiting some countries is more expensive than others, and knowing the exchange rate before you go can help you map that out. For example, things in England cost about the same as things in America—a book is about 20 units of currency, and you can get a hamburger for about 10 units of currency. But under the current exchange rate, the U.S. dollar is significantly weaker than the British pound (each dollar is only worth about .8 pounds). This means your trip to England could be a lot more expensive than you expect, because, in general, you’ll have to spend 1.2 dollars to get what one dollar would buy you in America. In other words, for every 500 pounds you spend, you’ll be spending 600 dollars.

This gets especially dangerous when you get used to the local currency and forget to make the conversion to dollars in your head. Knowing the exchange rate and the average costs before your trip will help you make a more accurate budget and save you from overspending by assuming that swiping your card for 20 euros is exactly the same as swiping it for 20 dollars.

What’s the Difference Between a Flexible and a Fixed Exchange Rate?

Most currency exchange rates you’ve seen or dealt with are what are known as flexible exchange rates. This means the rate shifts based on economic factors. Most flexible exchange rates only change slightly day to day, or they can be entirely stagnant, but the flexible rate is something to keep an eye on throughout your vacation. This website makes it easy to check live conversion rates.

Fixed exchange rates are only used by a few countries that do something called “pegging” their currency, typically against the U.S. dollar. This allows the government to control the exchange rate. Countries currently using a fixed exchange rate include Lebanon, Hong Kong, Saudi Arabia, Jordan, United Arab Emirates, Cuba, and Panama.  

The type of exchange rate doesn’t make much of a difference to travelers, unless there’s a major economic shift that occurs while you’re in the country.

What’s the Best Way to Pay While Abroad?

Gone are the days of reliance on shady airport currency conversion booths. We’ll go over the payment options you should have on hand and how to make sure they’re travel-friendly. Before you leave, you’ll need to notify your bank and credit card company that you’ll be out of the country. Few things are worse than getting locked out of all your accounts while you’re out of cell range.

Credit Cards

First, you’ll want a credit card that you can use internationally with no fees. Before you start shopping around, call your credit card company to see if the card (or cards) you have already are good for travel. If they have international fees or restrictions, it’s time to shop around. We like The Points Guy’s list of travel credit cards. He updates it regularly as card programs change, and he spells out the options so you can get the kind of card that works best for you. Because you can find credit cards with no fees and lots of perks, it’s a good idea to use your credit card to pay as much as possible while traveling.

A note to consider if you’re picking out a new credit card: Even though Discover and American Express have travel credit cards with no fees, they’re often hard to use when abroad. Lots of small businesses don’t accept American Express, and it can be hard to find companies that accept Discover overseas. Especially if you only have one card without international fees, it’s best to stick with MasterCard or Visa, which are accepted almost everywhere.

Debit Cards and Cash

Next, you’ll want a debit card and a way to get cash. No matter where you’re traveling to, you’ll need to have access to cash. Before you go, call your bank and ask about their international policies.

Many banks don’t have international fees attached to their cards. If your bank doesn’t have fees, the best way to get cash is to use ATMs at your destination. They’ll automatically exchange the currency at the best rate, and it’s by far the most convenient option.

If your bank has steep fees and this isn’t an option, you’ll want to get cash before you leave. If you go this route, never ever exchange currency at the airport. Airport exchange kiosks will charge you an arm and a leg for that transaction. To get the most favorable rate, it’s best to exchange the money at your home bank before you leave. You’ll have to put in a request, and it may take up to three business days for them to order the currency, so be sure to do it with time to spare.

Which Currency Should You Pay In?

This is maybe the most important part: Whenever you pay with a card abroad and they allow you to choose a currency to pay in, always choose the local currency. It would seem to make sense to pay in U.S. dollars since that’s what you have in your account. But, unfortunately, this is a common misconception. When you select this option, you’re allowing the business you’re paying to determine the exchange rate, and that rate probably won’t land in your favor. By selecting the local currency instead, you’re leaving the exchange rate up to your bank or credit card company, where it belongs.

If you’re still in need of a hotel room in whichever exotic location you’re about to jet off to, we’re happy to help. Unlike other online travel sites (and those expensive airport currency exchanges), we put your best interests first and make it easy to find the best possible rate on hotel rooms without any gimmicks or runaround. Visit Roomkey.com to see how we’re bringing truth to travel.