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Finding the best Foreign Exchange Rate
 
 
Resources
Exchange Rate Calculators
 
Finding the best Foreign Exchange Rate

Asilah Medina

Photo by Alfredo De Simone

One of the most frequently asked questions on travel forums is 'Who offers the best exchange rate?' Travelers want to know which website is the most competitive and which bank or foreign exchange service charges the lowest commission. Yet when changing small sums of money, searching for the best foreign currency exchange rate is as pointless as the hunt for the Holy Grail. On a €50 transaction, the difference between a Euro/U.S. Dollar rate of 1.29 and 1.30 is 50 cents. Scouring your travel destination for the best rate of exchange will likely cost you more.

Budgeting, a valuable vacation planning exercise, is a much better way to spend your time. Why? It will help limit the number of occasions you need to exchange currency. Changing money just once will have a greater impact on the actual exchange rate, the rate of exchange you actually get, than shopping around. Here's how it works. Changing €50 at an exchange rate of 1 Euro to 1.30 U.S. dollars yields $65. If the foreign exchange company charges a $5 commission you receive $60. Thus the actual rate of exchange you receive on your €50 transaction is 1 Euro to 1.2 U.S. dollars, not 1.3. If through your budgeting process you determine you will spend roughly €200 in cash and instead of changing €50 four times you change $200 once, you will significantly boost the actual rate of exchange. Changing €200 at an exchange rate of 1 Euro to 1.30 U.S. dollars yields $260. If the foreign exchange service charges a $5 commission you receive $255. The actual exchange rate has improved to 1.275. In short, you saved $15 by paying the commission once rather than four times.

Take note, this is not a plug for commission free. There is no free lunch in foreign exchange. Foreign currency services offering to exchange money commission free are making up the difference in the rate. To better understand this, let's revisit the €50 transaction mentioned above. Changing €50 at an exchange rate of 1 Euro to 1.30 U.S. dollars yields $65. If the foreign exchange company charges a $5 commission you receive $60. The actual exchange rate is 1.2. Thus for the commission free rate to offer value if would need to be 1.21 or better. Don't forget that size matters. Changing €200 at an exchange rate of 1 Euro to 1.30 U.S. dollars yields $260. If the foreign exchange company charges a $5 commission you receive $255. The actual exchange rate is 1.275. In this case, the commission free rate would need to be at least 1.276 or better to offer value.

Wondering where to start? Look to the web. Travel forums are a good resource for determining the cost of everything from taxi fares to meals. You may be surprised at just how many locals and astute travelers are willing to share their knowledge. Online foreign currency converters help determine the exchange rate range. Knowing how much you're spending when you hit the ground will help you consume wisely.

For travelers resolute on wearing out the soles of their sneakers, here are a few general rules of thumb.
  • The better rate of exchange is usually found at your travel destination.
  • Hotels typically offer the worst foreign currency rate.
  • Post offices, in general, do not charge an exchange rate commission.
  • Whether or not your ATM or bank card offers the best deal largely depends on the fee your bank charges for withdrawals made in foreign countries.
  • When changing very small amounts, commission free rates are likely to yield the better actual exchange rate.
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