CURRENCY

When checking out of your hotel, you are offered the chance to pay in the local currency or pound sterling using your credit or debit card. What should you do?

Avoiding overseas card charges

When you are paying for something abroad, sometimes you are given the choice of paying in either the local currency or sterling.

The advantage of paying in sterling is you can immediately see what the item will cost. The disadvantage is that it might turn out to be more than you would have paid in the local currency.

When you pay in the local currency, as well as taking into account the rate of conversion as applied by your credit or debit card provider, you may also have to pay a non-sterling transaction fee, which will then be added into your costs.

WHAT HAPPENS WHEN YOU USE YOUR CARD ABROAD?

When you buy something (or withdraw cash) abroad in the local currency, it will be subject to the exchange rate the banks apply and, in addition, a non-sterling transaction fee will probably be levied. This fee will depend on the card you are using. (Some cards do not charge the fee, although this may be a promotion or they may recover the cost in some other way, for example, through the exchange rate.)

Both the transaction in the local currency and the non- sterling transaction fee will be converted into sterling using what is called “the payment scheme exchange rate” from the day your transaction was processed. (For American Express, this is converted into US dollars first, then sterling.)

The two sterling amounts are then added together and divided by the original currency payment amount to work out the applicable exchange rate. Simple, huh?

HOW DOES IT WORK?

The following explanation is taken from Barclaycard’s website. If you already understand the above, feel free to skip it. Nigel makes a purchase of €50 using his Barclaycard Visa while on holiday in Dublin. On the day his transaction is processed, the daily exchange rate is €1 = £0.709395. So his purchase is converted from €50 to £35.47. He has to pay the 2.99 per cent transaction fee on the £35.47, which costs him £1.06. Add together the purchase and the fee, which is £36.53, and then divide that by the original €50 purchase amount to work out the new exchange rate (which includes the nonsterling transaction fee) – €1 = £0.73. Nigel’s statement will show the original charge and this new exchange rate.

WHAT IS DYNAMIC CURRENCY CONVERSION AND SHOULD IUSE IT?

Dynamic currency conversion is the term used for giving you the choice of paying in either local currency or in sterling. Paying in sterling makes the price you’re paying clearer and means you don’t have to pay the nonsterling transaction fee (2.99 per cent in the example above). But the retailer may still be charging you a conversion fee, and the exchange rate – set by the retailer – might not be as competitive as the ones set by Visa or American Express – so paying in sterling could end up costing you more.

WHAT SHOULD YOU DO?

Check the current exchange rate on credit cards, which is

Just say no – and insist on paying by card in the local currency

reset daily by Visa or American Express. Failing that, just say no – and insist on paying by card in the local currency. You will still pay the rate of the day plus the non-sterling transaction fee (unless you have a card that waives this fee, such as the Barclaycard Platinum or Halifax Clarity), but you will not suffer from what will be a substantially worse exchange rate.

WHEN IS DYNAMIC CURRENCY CONVERSION ASCAM?

It’s a scam when you’re not given a choice in paying it. For instance, when settling the bill in a restaurant, check that the conversion has not already been made when the point of sale machine has recognised your card as “foreign”. Our forum users have encountered this.

You can insist on paying in the local currency, no matter what the retailer, hotel or restaurant says, but you may later see a voided transaction on your bill.

In addition, it is often a scam because it relies on “knowledge asymmetry” – namely that we are unable to easily and quickly assess the overall extra cost of paying in sterling rather than the local currency. See more on our forum at