The process of exchanging currency is relatively simple. Of the many ways to exchange foreign currency, it appears that banks, credit unions, online currency converter providers, credit cards, and the forex market are some of the most beneficial ones.
If you wish to save money, it’s advised to track exchange rates, plan ahead, and shop around for the best deal. Exchanging foreign currency before your trip abroad will also get you more favorable fees and rates than airport currency exchange kiosks and currency vendors located in touristy areas. Converting your currency beforehand will also help you stick to a budget.
Many people will likely not be familiar with what an exchange margin is — which is no problem. In this guide you’ll learn all about it, including smart ways to turn your dollars into euros, yen, pesos, or whatever other currency you want, and fully answer the question: “how can I exchange foreign currency to get the most from my money?”
The exchange margin explained
Just like other financial products and stocks, currencies are part of a 24/7 forex, or Foreign Exchange, market. This means that the value of a currency relative to another currency can change rapidly, even from minute to minute.
Before we begin explaining what an exchange margin is, let’s go over some basics first. We use foreign exchange rates to get an idea of the relative value between two currencies. For example, how many Euros you can get for a US dollar. These rates are defined by a market that consists of big banks and other large institutions that exchange massive amounts of currency (aka the interbank market). When you ask a currency exchange broker or bank to exchange currency, they quote an exchange rate that equals the interbank rate plus the margin rate (another amount expressed as a percentage). In other words, banks and other currency vendors want to make a profit when they process a currency exchange. For that reason, they sell money at a rate greater than they purchase it. That is the so-called exchange margin.
For example, if the Interbank rate for converting US dollars to British Pounds is 1.18, the broker or bank may quote you 1.16 Pounds to the US dollar. So in this case, the charged margin rate is 0.02 Pounds for every US dollar you exchange. As you can understand, the higher the foreign exchange margin, the less money you get.
It should be noted that you will probably also be required to pay service fees for exchanging currency. That’s why it’s critical to pay attention to both the fees and margin to get the best deal on currency exchange.
What NOT to do
Many travelers prefer the convenience of airport currency exchange or the exchanges situated around popular tourist areas. They need money now so they tend to exchange the money in their wallet for the local currency without ever considering varying rates or margins. Instead, they open their wallets and accept whatever amount an airport currency kiosk will give them. Getting something now is better than nothing, right? Wrong!
You can be certain that exchanging currency at an airport currency exchange kiosk will mean a larger exchange margin and significantly higher fees than almost any other location. So if you use one to change your money into the local currency when you land in your destination airport and then do the reverse before you fly back home (change back any leftover local currency), you will certainly end up losing money not only once but twice.
Your currency exchange options
Traditionally, the local credit union or bank was potentially the best place to exchange currency if you didn’t want to pay enormous fees. So if you wished to exchange currency before you left the US, for example, you had to head to the nearest bank to see the current exchange rate.
However now with the growth of companies like Cashero, and similar digital payment providers you can quickly hold and exchange currencies, for minimal to no fees. These digital companies often show any fees they do have up-front, offer real time exchange rates, and can provide various ways to access your money. Creating and verifying accounts with such companies is often a quick process, so you can get set-up right away and begin making exchanges as you need to. As this type of digital currency exchange is relatively new, each company may have slightly different options regarding what they offer, so be sure to do your research.
Additional ways to exchange currency include:
· ATMs – Compared to exchanging currency at an airport kiosk, withdrawing foreign currency from an ATM is a much better option. If you choose this method, it is best to get a large amount in one go rather than several small sums throughout the duration of your trip. This will help you pay the least amount in fees (usually between 1%-3% per transaction). You can expect to pay a service charge to the ATM provider and also a foreign transaction fee to your home bank. Be careful as these fees can quickly add up.
· Credit card(s) – Many people don’t want to carry large sums of cash with them when traveling abroad so they use credit cards to make their purchases. In this case, remember that you might be charged a foreign transaction fee whenever you use your credit card to buy something in the country you have visited. These charges can add up to a considerable percentage of your trip’s overall cost.
· Online currency converter providers – This is a handy solution to exchange foreign currency online. You can pick up the desired currency from a local vendor or have it sent to your home address. If the latter, most platforms will add a delivery fee to the overall charge, which in some cases can be less favorable than using a bank to exchange foreign currency.
· The Foreign Exchange market – This method applies to those looking for ways to hedge against currency volatility by going beyond ordinary international payments. The global Forex (foreign exchange) market enables you to exchange foreign currency, obtain foreign currency for an international sales trip, convert customer payments from other currencies, or pay suppliers in foreign currency. Individual foreign exchange traders can even use the forex market to sell currency at a higher price than the purchase price and make money. Banks, on the other hand, can use the forex market to exchange one foreign currency with another. So basically everyone can use the foreign exchange market to trade currencies. To exchange foreign currency, you can seek out a forex dealer or broker or use online trading platforms. These kinds of platforms are often not suitable for individuals looking to easily exchange currencies for the purpose of international travel.
· International wire transfer – This is a common way to make cross-border payments for both individuals and businesses alike. However, you cannot expect to get an instant exchange of currency like at an ATM or kiosk. Instead, the financial institution takes care of the foreign exchange currency conversion on the back end of each transaction. You can make a foreign exchange wire transfer via (1) credit unions or banks or (2) dedicated wire transfer services. The process in both cases is the same – the sender sends their currency, and the recipient gets the sum in their desired currency after the online service or bank takes care of the transfer and exchange. The difference is that some wire transfer services have lower fees than banks and credit unions as they do not use intermediary banks.
You will need to fill out paperwork and sometimes register with a particular service before you can exchange foreign currency via an international wire transfer. Bank wire transfers can be done online, by phone, or in person. As for the rates and fees, they depend on how many intermediary banks will be involved in the process and the chosen financial institution itself.
Final Thoughts
When traveling abroad, being able to use the local currency is a convenient, and oftentime necessary way to get around and immerse yourself in the environment. To make the most of your foreign experience, it’s important to get the best deal when exchanging currency.
Finally, you may like tools such as currency exchange rate conversion calculators which show currencies from all over the globe and are usually updated in real time. In addition, platforms that display current exchange rates and enable you to compare the average bank rates with the rates of foreign transfer providers and travel money providers can come in handy.
Last but not least, be sure you know how much your money will be worth after paying for the extra fees and profit margin to catch the best deal. And look into Cashero, you’ll be surprised at how easy and affordable foreign currency exchange can be.
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