Exchanging foreign currency can be tricky, given that exchange rates continue to change regularly. Even a seemingly insignificant difference in exchange rates can have a considerable effect if you plan to exchange a large sum. Fortunately, there are steps you can take to ensure that you get the best possible exchange rate.
Do Some Research
Start the process by finding out what the prevailing interbank rate is for the currency pair you wish to trade. The interbank rate is the rate at which banks buy and sell currencies with each other, and is rarely available to the public at large. However, it gives you an indication of what to expect. Some popular money transfer companies let you track the performance of different currencies over varied periods of time, giving you the ability to determine if it is a good time to buy or sell.
Look Beyond the Exchange Rate
The cost of trading currencies depends on more than just the applicable exchange rate. Whether you wish to send money overseas or purchase travel money, bear in mind that different types of fees may apply on your transfer. These may include transfer fees, currency conversion fees, delivery fees, as well as fees for payments made via debit and credit cards.
Using Debit, Credit, and Prepaid Cards
When travelling overseas, using a debit, credit, or prepaid card may work well for you when it comes to taking care of day-to-day expenses. If you plan to travel to more than one country, you may consider getting a prepaid multicurrency card. These cards give you the ability to spend in local currencies, thereby circumventing costs related to currency exchange.
A number of debit and credit cards come with overseas transaction fees, and these are ones you must avoid using. Local vendors might charge additional fees for accepting card payments, so check in advance. If you plan to use your debit card at an overseas ATM, you might have to pay fees to your bank as well as the ATM’s owner. With prepaid cards, watch out for loading fees, ATM withdrawal fees, and inactivity fees.
Avoid Dynamic Currency Conversion
Dynamic currency conversion might enter the picture if you plan to use your debit or credit card overseas. This happens when a local vendor charges your card in the currency in which it is issued. For example, you may make a purchase in Vietnam using an American card, and the shopkeeper charges your card in U.S. dollars.
The reason you need to avoid dynamic currency conversion is when an overseas merchant charges your card in this way, the conversion rate that applies is usually considerably higher than the existing rate. The merchant then pockets the difference.
Lock in the Exchange Rate
Some of leading money transfer companies let customers lock in exchange rates for up to two years through forward contracts. This gives you the ability to lock in a favorable exchange rate for a transfer you wish to carry out in the future, and you do not have to worry about negative fluctuations in the market affecting your transfer. You might need to make a deposit to set up a market order.
Wait For a Better Rate
If there is no definite timeline surrounding your need to send money overseas, you may wait for the market to swing in your favor by going the market order way. With a market order, you get to decide what rate you want to transfer money at, and when the market reaches the desired level, the company you work with automatically carries out the transfer.
When working with a company that deals in foreign exchange, remember that the exchange rates you get come with markups. This gives you an opportunity to negotiate, and this might just work for you if you plan to exchange a large sum. Some companies are even known to match rates provided by their competitors.
What About Multicurrency Accounts?
If you need to send or receive money to or from different countries regularly, consider opening a multicurrency account. While some of the top banks offer this functionality, their fees and exchange rates often leave room for improvement. Now, you get to choose from multicurrency accounts provided by top money transfer companies such as TransferWise and WorldFirst. With a typical multicurrency account, you get to hold funds and transact in various currencies, and you get to save in currency conversion fees.
No matter what your currency exchange requirements, it pays to plan ahead. Do not wait to exchange currency at the airport or the hotel because you will, in all likelihood, get a less than favorable deal. Ideally, get quotes from multiple companies and then select the one that you find to be most cost effective.