Research by travel money online specialists The Currency Club has found that a continued lack of transparency by high street banks combined with a lack of public awareness results in significant hidden costs for travellers using a debit or credit card overseas.
“These extra charges occur regardless of whether money is withdrawn from a local ATM or the card is used at the point of purchase and can amount to spending an unnecessary extra £47 for every $1000 purchase, compared with buying foreign currency before travelling,” said Sam Thakkar, director of The Currency Club
In 2010, 55.8m British residents travelled abroad and in the last half of the year they wasted approximately £60m on credit card charges. A new survey conducted with both business and leisure travellers in January and February 2011 by The Currency Club found that over half of those who use their credit cards abroad have no idea what charges are being applied.
Mr Thakkar said using a credit card as a source of foreign exchange overseas is a poor choice that leaves the traveller a lot worse off at the end of the trip. Some banks will apply not one but two hidden costs to each transaction, leaving the majority with a nasty shock when they return home to check their bank balance.
“These wasted pounds are made up of a percentage fee – usually around three per cent of the value of the transaction – simply for the privilege of using a credit card abroad. A second loss then occurs at the point of transaction as the exchange rate provided is often appalling. It is certainly incredibly uncompetitive when compared to online travel currency exchange rates.”
Mr Thakkar said: “The Currency Club called five major credit card providers in January 2011 to understand the total spread that a customer can incur when using their ‘flexible friend’ overseas. The scenario: A traveller using their GBP card to transact in the US. The ‘privilege’ fee of using a credit card abroad varied from two to three per cent from bank to bank. When the spread of the interbank exchange rate was included, the total fee incurred by the traveller equates to approximately six to seven per cent of the cost of the purchase.”
He remarked that that meant that a traveller making a retail purchase of $1,000 on their credit card can expect an exchange rate of 1.47 including fees. This makes the total cost of the item $1,000/1.47 =£680.27.
The Currency Club online exchange rate for pounds to dollars is 1.58, so the cost of the item using travel currency bought in advance online is $1,000/1.58 = £632.91. The consumer paying with a credit card is charged an additional £47.36 simply by virtue of the fact they used a card rather than cash, he added.
The Currency Club also found that certain banks can place limits of £1,500 on debit card transactions to a third party site offering better savings – such as The Currency Club’s site. There is evidently a conflict of interest here given that banks and foreign currency providers both supply travel money. On a debit account it is worrying that banks are able to dictate spending thresholds as the amount should be at the traveller’s complete discretion.
The account holder should be able to benefit from savings to be made with online exchange rates, particularly when the purpose of a debit card is simply to provide convenient access to one’s own money.
Following their investigation, The Currency Club concluded that most banks refuse to disclose with clarity the exchange rate they charge the end user and in many cases the bank’s representative is not entirely sure of the spread or fees charged. It is no surprise travellers are unaware that they are getting a poor rate.
The entire process of discovering what banks are charging is tiresome and tedious as most queries regarding credit charges and cash withdrawals will reroute to overseas call centres which in many cases won’t have access to or knowledge of those exact figures.
Withdrawing cash using debit card at a cash point in the resort can seem like a convenient alternative to spending on a credit card. However, this also ends up being a bad decision that holidaymakers pay handsomely for. Not only is there a charge for accessing personal finances overseas, but as discussed above the poor exchange rate offered from the bank can also short change the traveller.
Some banks charge a transaction fee of £1.50 or more every time money is withdrawn or a debit card is used to pay for something overseas.
So what’s the best option for converting hard earned pounds to dollars, euros or other travel money currencies?
Avoid airport bureau du change as you’re a captive customer so they don’t need to give you a good rate and avoid the high street providers.
The best exchange rates are to be found online. Buying currency online from reputable and long established companies is the quickest way of sourcing the best exchange rates possible and a safer alternative to buying over the counter.
Sam Thakkar, director of The Currency Club, said: “Hidden charges at foreign ATMs and poor exchange rates on credit and debit cards can mount up and there is not enough information flow to alert travellers about this.
“Our own experience when conducting research highlighted how difficult it is to obtain accurate information on fees.
“It’s comforting to know that more than half of people still pay with cash when abroad and banknotes is still the number one mode of payment.
“The sooner travellers get online and realise how sharp our exchange rates are, the sooner they can benefit from the savings.”