Paying by card abroad: why to choose the local currency

You tap your card in a Madrid café or at a Tokyo ATM, and the screen asks a question: pay in euros or yen, or in your own currency? It looks like a helpful offer. It is actually a choice between two ways of converting your money, and they rarely cost the same.

This guide explains what happens behind that screen, which fees to look for on your card, and a few habits that keep the cost down.

Two ways to convert

When you pay by card or withdraw cash in a currency that isn't your card's, the amount has to be converted. The European Commission describes the two options you are usually given:

• Pay in the local currency. The card network and your own bank handle the conversion. You see the exact cost in your currency when the transaction appears on your statement.
• Pay in your home currency. The shop's bank, or the ATM operator, converts the amount on the spot, for a fee. This service is called dynamic currency conversion (DCC).

When the Commission proposed new rules in 2018, it noted that consumers had been complaining about DCC because they lacked the information to make an informed choice, and that as a result they "often unwillingly choose the more expensive currency conversion option".

What the EU requires on that screen

Since 19 April 2020, EU rules have required more transparency for card payments and ATM withdrawals that involve a currency conversion. Under Regulation (EU) 2019/518:

• Before you pay, the party offering the conversion must show you the amount in the local currency and the amount in your card's currency.
• Conversion charges must be expressed as a percentage mark-up over the latest euro reference rates published by the European Central Bank (ECB).
• Card providers must publish their mark-ups on an easily accessible electronic platform, such as a website or app.

If your card was issued in the EU, a second step has applied since 19 April 2021: after a card payment in another EU currency, your bank must send you an electronic message showing the mark-up.

These rules apply in the EU. Elsewhere, the question on the screen can look similar, but the information you are shown may be less complete. The safe habit is the same everywhere: choose the local currency.

The fee your own card may charge

Choosing the local currency doesn't make a payment free. Many cards add a foreign transaction fee, sometimes called a currency conversion fee, whenever you pay in another currency.

The US Consumer Financial Protection Bureau (CFPB) explains that this fee can be made up of charges from more than one party. Its example: a card network charges 1% and the bank that issued the card charges another 2%, for a total foreign transaction fee of 3 percentage points.

Look for this fee in your card's terms before you travel. Some cards charge it, some don't, and the difference adds up over a long trip.

An illustrative example

These figures are invented to show the arithmetic; your card's terms will differ.

You pay a restaurant bill of 200 euros with a card that charges a 3% foreign transaction fee. Paid in euros, the bill costs you the equivalent of 200 euros at the network's rate, plus 3%: about 206 euros in total.

If the machine offers DCC with a 6% mark-up and you accept, the same bill costs about 212 euros. And depending on your bank, you may still be charged the foreign transaction fee on top.

ATMs: two traps

A credit card at an ATM is a cash advance

The CFPB is clear: you can withdraw cash with a credit card, "though it is expensive to do so". A withdrawal counts as a cash advance:

• the card company may charge a flat fee or a percentage of the amount;
• cash advances usually carry a higher interest rate than purchases;
• interest starts as soon as you withdraw the money, with no grace period;
• many cards set a separate, lower limit for cash advances.

For cash abroad, a debit card is usually the better tool. Check its fees too.

The ATM operator's own offer

ATMs abroad may charge their own fee, which the CFPB also warns about, and many offer DCC. If the screen proposes to charge your account in your home currency, decline and continue in the local currency.

Habits that keep costs down

• Read your card terms before you leave. Note the foreign transaction fee and the cash advance fee.
• Take two cards, ideally from different networks, in case one is declined or blocked.
• Always choose the local currency at card machines and ATMs.
• Withdraw larger amounts less often if your bank charges a fixed fee per withdrawal, while keeping safety in mind.
• Check your statement after the trip and contact your bank about any charge you don't recognise.