What FX (foreign exchange) companies don’t tell you about foreign exchange transaction costs: top tips for changing currency

When it comes to foreign currency exchange, transactions can get very expensive if you don’t shop around for the best possible deal.

From bad exchange rates to hidden charges from both banks and FX companies there are a number of factors that will influence your decision when choosing a vendor for your currency exchange. It’s important to note that these companies won’t always be transparent when it comes to any associated costs. As a result, you could find yourself faced with hidden fees that you could have avoided by conducting more research.

Carson Yarbrough, Savings Expert, at Offers.com advises “It’s very important to let your bank know when you are leaving the country and to disclose all the destinations of your trip. This is to make sure the bank is aware of your travel plans, so they don’t cancel or freeze your account on a purchase they might flag as “suspicious activity” or a change in your normal transaction pattern.”

It’s also important to be aware of the exchange rates for credit and debit card transactions before you make a purchase abroad as these will also present extra charges.

Bessie Hassan, the Money Expert for finder.com.au, says: “My top tips for exchanging money are to avoid exchanging over FOREX counters at the airport or at major hotel chains, consider a forward contract to lock in a favourable exchange rate, and research the fees of different providers before committing to a transaction.”

Here’s what some forex companies don’t tell you about foreign exchange transaction costs, as well as our top tips for changing currency…

Beware of bad exchange rates and extra charges

It’s widely known that if you’re going abroad and you change your currency at the airport on the day you travel, you’ll end up paying considerably more than if you were to make the most of the Post Office or a specialist FX company’s rates. However, you may not know that banks also provide some of the worst exchange rates when sending money abroad.

As Time Doctor explains, the banks trade at the “inter-bank rate”, which is the “true” (or market) exchange rate. Banks will then add significant commission. This can be as high as 13% for round-trip (when you change your money to a foreign currency, then change it back), although the average fee for single transactions is typically around 7%.

Another thing you should be aware of is that both banks may add charges, so you could be stung twice (or three times!).

Barry O’Neill, Managing Director at Clear Treasury, says: “I always have three top tips for managing your FX. Firstly, watch out for banks overcharging you on the rate of exchange you receive; there are providers that can save you up to 3% per transaction, which adds up very quickly if you’re a small business. Secondly, banks will also add hidden fees including transfer charges to send the money which often unnecessarily eat into profits, so you’ll want to find a service which charges no additional fees when sending money to anywhere in the world.

Zoe Macfarlane, contributor of KarryOn shares her own exhange horror story “Despite counting and recounting in front of the black market money changer, he still managed to short change me $100 in my transaction. It was an amazing slight of hand, if only it wasn’t my money.”

“The final, and in my opinion, the most important tip is eliminating exchange rate risk when entering contracts overseas.”

Ian McLaren from Essential Travel Items also advises to be wary of bad exchange ranges if you choose to exchange currency when you reach your destination. He says: “When it’s your first time in a country, you’ll most likely look for the biggest, most trustworthy bank branch or exchange desk. However, this would be a mistake. If you look for an exchange desk a little further away from your hotel or on the outskirts of a city you stand a better chance of getting a favourable exchange rate.”

Be aware, that not all countries/locations take cards, Simone Semprini, Co-founder & CEO at Tour Scanner recommends “having some ‘survival’ cash (50 euro/dollars) of widely accepted currency, which can be exchanged in every currency exchange desk.

As well as asking about any charges, make sure you ask your provider about the spread. This is the difference between the ‘bid’ and ‘ask’ prices used by the banks/brokers, in other words the spread denotes the amount of money the bank makes off of your transaction. The higher the spread, the higher the bank’s profit off your exchange, and the worse rate for you.

Think before using credit and debit cards abroad

If you use your credit or debit cards abroad it’s important to remember that you’ll be charged a fee for every transaction you make.

These can be very high depending on your bank and where you choose to make the transaction, and leave you with an awful exchange rate. As Confused explains, you will typically be charged 2.99% of the amount spent for instore purchases, and an extra fee of between £1.00 (AUS $1.70) and £1.50 (AUS $2.55) may be added for debit cards depending on your card issuer.

ATM withdrawals charge around 2% to 3% for debit and credit cards respectively, in addition to possible additional fees. You may also be charged interest which can be as high as 30%.

This interest will need to be paid until the credit card is cleared and this can often be at a higher rate than ‘home’ transactions. Banks will often save these as the last amount to be paid off. As a result, you could be faced with a big bill that continues to grow.

Parking at Airports is a money saving airport parking site that offers tips and advice to their visitors. Their Marketing Manager, Tegan Groombridge, advises people to use a prepaid money card when travelling abroad. She says: “The advantages of this is being able to load a budget onto your card that can be ordered in advance (at the best price), and picked up at the airport on the day you fly. The cards act like a debit card so it can be used in most card machines all over the world (including cash machines) at a lower rate than your own debit card. If you don’t spend all your money’ or you have multiple destinations to visit, you can transfer your balance from one currency to another one. The cards are entirely free, easily managed online, and we love them.”

What do you need to know before choosing a foreign exchange company?

When it comes getting the best foreign exchange transaction costs, you should be aware that changing money is made up of 3 elements; the market rate, spread, and commissions.

The market rate is the “true” exchange rate before extra charges are added by the likes of banks and brokers. As the market rate fluctuates, a broker will be able to advise you of the best time to trade.

The spread is the difference that’s paid by the broker or bank for the currency exchange, and what is paid by you. This will be around 4% if you decide to use a bank.

Finally, commissions are any extra fees you’ll be charged by the foreign exchange company. As Money Supermarket explains, these fees typically range between £1.25 (AUS $2.13) and £3.00 (AUS $5.11), and come in three forms; minimum charges, flat fees, and handling fees. Ask about any additional charges before you choose a company for your foreign exchange; flat fees, for example, can often work out cheaper.

At WhichFX, we make things easier by taking out any hidden extras, and providing you with complete transparency on what you’re being charged for and why. When you submit your quote to us, we’ll also find you the broker with the smallest margin on the spread; this means we’ll offer you the best foreign exchange deal available on the market.

For more information on how WhichFX can help you, check out our FAQs or try our Quick Quote tool.

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