Credit Card For Overseas Travel: What Is The Cost?

   

More and more people are traveling overseas compare to 10 years ago – thanks to globalization and the boom of  “low cost airline”.  But how they actually fund themselves on that overseas trip? I would bet that most of them will just carry the cash with them. Probably they don’t really know that their credit card can be used for the trip effectively. But what is the cost of doing that ? Let see why using credit card should be the most convenient, cheap and safest way to use for your next overseas travel.

A little trick at Money Changer they don’t tell you about…

Most of the money changer / foreign currency shop will display “No commission” and people falsely feel that they just change more than enough money for the trip and then the unused money can be changed back later. But this way carries a hidden cost. It’s from what’s called “spread”.

Currency Exchange

For example: I am in Sydney Airport and about to travel to Hawaii and I want to change my Aussie Dollar to US Dollar, this means I want to buy $US and the shop will sell the US$ to you. In the shop you will see something like this: US$ Buy1.160 Sell 1.237.  This means they will sell US$ 1  for A$1.215, but will only buy US$ 1 for A$1.160. So my A$10000 then become $10000 / 1.237 = US$8084.  Now, after the trip you did not actually use all of it, you just use half , so you still have $US4042 in your pocket and you want to change it back to $A. So US$4042 will bought at 1,160 rate and become 4042 x 1.160 = A$4,688. So, your half of your $10,000 is no longer A$5000. It  is now only $4688, thanks to “spread”. (The difference of $312 is the profit for that shop – that’s how they make money)

So, changing more money than you need is not a good idea as you will have to pay the spread to the money changer. (Of course, if during that holiday, say the $A become significantly weaker, then probably you pay very little spread, but on the other hand, if the $A become significantly stronger then you pay even more to change back to where you were)

Furthermore, carrying cash is probably very risky as it can get stolen quite easily.

Credit Card Cost

Let us see about credit card. Yes, even with credit card, you will need to pay the exchange rate – no one will escape from this if they want to change currency. But who will likely able to give you the best currency rate,  a local money changer with tens of thousands proceed a day or Master Card/Visa/American Express with billions of dollar a day ? I would say the chance are the one with big proceed will give better deal.  Of course, not always, you will probably find some local shop that is “on sale” and give you better deal, but it is unlikely as these local shop also get their supply of money from their banks who deals with these credit card companies on wholesale pricing.

On other note, there are “transaction cost” that usually being charged for international transaction. And 2 middle men charge this transaction fee: the credit card company and your bank/card issuer. But the total amount of fee will likely no more than 2-3% (although depend on the country and currency. But if they charge extra for certain currency/country, the chance are the local shop will charge even more expensive rate). Check your credit card fine print for more detail.

Recommendation For Overseas Travel – Money-wise

So, knowing both aspect above, here is the list of recommendation for your consideration for your next overseas trip

Prepaid the bulk cost of your trip: airfare, hotel, guide tour, car rental, etc before you depart. And yes, pay it with credit card as you will accumulate points (but don’t pay surcharge for this as it will defeat the purpose)

Bring only minimum cash of the foreign currency only to cover petty cash: pay tips, buy ice cream, small purchase, etc. Just exchange whatever amount that you think you would use it up. Don’t plan to have the money exchanged back.

Pay everything else with your credit card: souvenier, taxi, restaurant bill, theme park ticket, etc… Everything else. Just pay with your credit card.

Have online access to pay your credit card from internet. You need to be able to transfer some money from your saving account to your credit card account as your credit card limit is not supposed to be that high. Do this maybe once a week or so at your convenient

How about emergency fund ? If you can have debit card: “Debit Master Card” or “Debit Visa” this will be your best alternative as the money will not be touched until you withdraw them in emergency and the cost of withdrawal is very very small.
Other alternative is to prepare traveler’s cheque for your trip. They have better spread in case you want to convert back to original currency and you can split it for your convenience. Say you want to carry $10,000 emergency fund, then you can purchase 2 x $5000 traveler’s cheque. This way, if you only need to access only some of that emergency money , you don’t need to cash out all $10,000.
Otherwise, just spare some credit limit on your credit card for this emergency purposes. But withdrawing cash from credit card is quite expensive, not only it attract the interest rate straight away (regardless of free interest day period) it also attract cash advance fee at the time of withdrawal.

Final words

The actual cost using credit card for overseas travel is just that “transaction cost” around 2-3% that will be charge for each transaction. But avoiding this cost by carrying cash is becoming more expensive at the end. Not only the risk of cash being stolen but financially, you will pay “spread” cost to put the cash back into the original currency. This is a hidden cost that not many people realize it.  Just bring and exchange cash for petty expense and don’t expect to change it back to the original currency.

So, as final word: just use your credit card on your next trip: domestic or international !

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Denis Kristanda  

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