Travelers should look to convert their currency before embarking on a trip or know where to go to save on changing money while abroad. Trading currency at a hotel or even a currency kiosk in an airport or elsewhere in the country can be costly due to poor exchange rates and high fees. The best options are more likely to be associated with your local bank or credit union, so it's important to plan ahead when it comes to exchanging currency.

Understanding Exchange Fees

Currency exchange fees play a crucial role in the global financial landscape. These fees are the charges applied by financial institutions or currency exchange services for converting one currency to another. Financial institutions that provide currency exchange services take on the risk of price fluctuations; if they hold one currency and it goes down in value, they theoretically need to be compensated for holding this currency. Behind the scenes of a currency exchange transaction, there are significant operational costs as well. Banks have to keep up with maintaining the necessary infrastructure and technology. Financial institutions also need to invest in secure and efficient systems to ensure they're using accurate exchange rates. Exchange fees help cover these operational costs. Last, financial institutions are profit-driven entities. Banks and similar entities are in the business to make money. Offering currency exchange services is one way they generate revenue. While competition in the market helps keep fees competitive, financial institutions still need to generate sufficient income to remain sustainable and one way they do this is by charging fees for certain services.

Exchanging Currency at Home and Overseas

With the context of why fees occur behind us, let's start digging into how to avoid fees. You can begin by finding out what a fair exchange rate is for the country or countries you'll be visiting. Check key currency exchange websites first. The following are some of the best and least expensive places to convert currency:

• Local banks and credit unions usually offer the best rates.
• Major banks, such as Chase or Bank of America, often offer the added benefit of having ATMs overseas.
• Online peer-to-peer foreign currency exchanges
• Online bureaus or currency converters, such as Travelex, provide convenient foreign exchange services.

Ordering cash online will likely include delivery charges, and the exchange rate won’t be as good as with your bank; however, this is still a better option when compared with the must-avoid options below.

Piggybacking on the suggestion above, if you don’t have time to get the foreign currency before leaving or don’t want to carry a lot of cash, check to see if your bank has ATMs in the destination country or its cities. It may even have banking affiliates there. A key tip is to use an ATM within the airport as soon as you arrive.

When you’re back in the U.S., head to your bank or credit union to transfer any leftover foreign currency to U.S. dollars. It's important to note that some banks will not take foreign currency. As a last resort, if you have foreign currency left over before you depart the country you're visiting, look to convert it at an airport kiosk or a store before leaving.

Using Credit vs. Cash for Foreign Transactions

The world has become so digital that most people no longer walk around foreign countries with traveler's checks and money belts. That’s why you should take both a no-foreign-fee debit card and a no-foreign-transaction-fee credit card with you. The likes of Chase, Bank of America, Capital One, and other major credit card issuers offer specific no-foreign-transaction-fee cards.

However, don’t use your credit card for a cash advance to receive foreign currency. Doing so means you’ll get hit with a cash advance fee and a high interest rate that starts accruing immediately. The widespread use and enhancement of technology have helped make using credit and debit cards possible in most parts of the world. However, there are exceptions, so it is worth investigating whether your destination accepts debit or specific cards before you go on a trip.

Other Travel Tips

One thing to do before traveling abroad is to let your bank and credit card companies know of your travel plans, although some banks are moving away from encouraging this practice. That way, if you use your credit or debit card abroad, these companies won’t cut off access to your account due to concerns of fraud.

Also, avoid paying in U.S. dollars while outside the country when possible, even if a merchant offers to convert them for you. This includes paying with a credit or debit card. The merchant would likely convert at a rate that’s disadvantageous to you and charge fees. The same goes for paying with U.S. dollars in the form of cash.

Worst Places to Exchange Currency

Some places that you should avoid for exchanging currency are:

1. Airport kiosks and stores when heading to a country (not to be confused with airport ATMs): Plan ahead, as airport kiosks generally charge some of the highest fees and have the worst exchange rates. When returning to the U.S. with foreign currency to trade in, however, this sometimes might be the only option.
2. Traveler’s checks and prepaid debit cards: These are not efficient and often carry various transaction fees. They add little benefit, in terms of security, when compared with cash. Prepaid debit cards also come with card fees, foreign transaction costs, and ATM-use charges. 
3. Hotels and tourist areas: Similar to airports, hotels and tourist-centric areas may provide convenience, but they generally charge higher fees for currency exchange. These locations cater to tourists who may prioritize convenience over cost-effectiveness.
4. Remote locations: In remote or less frequented destinations, currency exchange options may be limited, and providers may take advantage of the lack of competition by charging higher fees. It may also be more administratively burdensome to replenish and monitor these sites, so entities may charge higher fees in return.

When to Exchange Currency

Throughout this article, we've talked about it's best to optimize your foreign currency exchange before your trip. Even in international cities you should avoid last-minute exchanges and utilizing tools like limit orders or rate alerts in advance of your trip can help secure more favorable rates. Additionally, staying informed about economic events that may impact currency values allows for strategic timing.

There's a few other bits of advice on timing. The currency markets operate 24 hours a day during the business week, but they usually close over the weekends. During these market closures, there is no active trading, and as a result, liquidity tends to be lower. Lower liquidity can lead to wider bid-ask spreads, making it more expensive to execute currency transactions. In addition, holidays can have a similar impact on currency markets. On public holidays, financial institutions and markets in specific countries may be closed, leading to decreased trading volumes and liquidity. This reduced liquidity can again result in wider spreads and less favorable exchange rates.

The Bottom Line

If you do a little homework before leaving for your trip by checking exchange rates, you’re likely to save. Remember to stick to ATMs and no-transfer-fee credit card spending, and avoid exchanging money at airport kiosks, hotels, and buying things with U.S. dollars to avoid costly exchange rates and fees.