Credit cards or cash: Which is better for overseas travel?

It's wise to carry both, but there are certain considerations one should make before deciding which one to use and when.

David Zalubowski/AP/File
A traveler hurries along a bridge beneath the canopy roof of the terminal at Denver International Airport.

While it’s always wise to carry both cash and credit cards on you when traveling, there are certain considerations one should make before deciding which one to use and when. For the most part, if you have a credit card with no foreign transaction fees you will probably be better off paying with that over cash in most scenarios. However, you should understand the following nuances before the next time you whip out your wallet.

Consider the Exchange Rates

Sometimes, the only currency exchange kiosks available to you may be offering bad rates on the dollar. If you choose to pay for something in a foreign currency using a credit card, it will be the card networks (Visa, Mastercard, etc.) that decide the price at which you must buy that currency. You can view the rates they operate with on their respective websites by simply searching “[NETWORK NAME] currency exchange rate” through Google. Of course, you should substitute the name of the network in for that of your credit card.

However, exchange rates aren’t the full equation. You need to be aware that even with a better exchange rate, credit cards can still be a worse deal. Foreign transaction fees can significantly inflate the cost of using your credit card overseas.

Foreign Transaction Fees

One thing you may have to contend with when using credit cards abroad are foreign transaction (FX) fees. Anytime your credit card payment passes through a foreign bank, your issuer will likely tack on a charge for processing it. These can vary between 2.7% and 3%. Some cards will charge you slightly lower fees if the transaction was carried out in U.S. currency. However, as we’ll discuss in the next section, you’re almost always better off dealing with foreign currency.

Some credit cards come with no foreign transaction fees, making them the ideal choice for international use. If possible, use such a card when you travel to another country. You can find out whether your credit card charges FX fees by looking at the rates disclosure that comes standard with every card. They will always be listed under the Fees > Transaction Fees section, beneath the table explaining interest charges. Typically credit cards intended for travel will have no FX fees.

Pay in the foreign currency, if you’re going to use a credit card

Whenever you try to pay for something with a credit card in a foreign country, you may be asked whether you’d like the merchant to convert it to U.S. dollars. This is known as “dynamic currency conversion”, and it is generally a bad deal. We recommend you choose to pay in the foreign currency instead. The reason: conversion rates. When you allow the merchant to change the price to dollars, they are likely to pick rates that are unfavorable to you – that is ones where the dollar is weaker, so they can charge you more. As we mentioned above, when a transaction in a foreign currency passes your credit card it is the networks that decide your exchange rate. These tend to typically be more in-line with fair rates.

Note that we’re not saying all merchants will try to do this. However, it is safer to go by the rule of never engaging in dynamic currency conversion.

You should also know that dynamic currency conversion doesn't negate FX fees. You still have to pay those since your transaction will pass through a non-U.S. bank.

This article first appeared in ValuePenguin.

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