If you're making a payment abroad using a credit or debit card, you may be asked whether you want to pay in the local currency, or in Sterling. This might seem an innocent enough question, but beware because a nasty sting in the tail awaits those who ask to pay in Sterling.
Typically you are better off opting to pay in the local currency, rather than converting to Sterling as you make the purchase. If you pay using the local currency, the transaction will then be converted into Sterling at the Mastercard, Visa or Amex own rate. This rate is set daily by Mastercard, Visa or Amex and is linked to the interbank rate, which is a wholesale price agreed between banks. Your card provider will then typically add their own profit margin – usually between 2.75% to 2.99% and the total cost will appear on your statement in Sterling.
Should you elect, however, to pay Sterling at the point of purchase, a service known as Dynamic Currency Conversion (DCC) may be employed which allows the merchant – that is the shop, bar or restaurant – to set their own exchange rate rather than using the Mastercard or Visa official rate. Surveys have shown that this can typically add around a 7% fee; Cash machines seem to be the biggest culprits, with the conversion having been shown to add up to 18% of the cost of the cash withdrawal if you choose to be billed in Sterling, and not the local currency. If you consider how much you may spend on your card during a typical holiday this huge cost can add up to a big, nasty surprise when you open your statement the following month – so beware, and if not offered the opportunity to pay in the local currency, you should ask for it.
Small differences in the interest rates you are being charged, or the interest rates your savings are earning, can add up. If you want to make the most of your money and you’re interested in fixed-term, fixed rate investments you’ll find more information about Daven Trust’s Fortress Bonds by viewing our Investments Information page.
For more information on how to make the most of your holiday money, we've covered 7 tips to cut the cost of holiday cash.
Jeremy Stevens
Investment Marketing Team