When you're traveling abroad, you want to get the best deal on currency exchange. Here's the smart way to turn your dollars into yen, euros, and pesos.

The first time I flew across the world alone, I packed traveler’s checks. They made me feel safe and responsible.

In Israel, they weren’t widely accepted. I went to the nearest currency exchange booth to turn my checks into shekels. Did I get a good exchange rate? I have no idea.

Currency exchange may seem like a simple necessity: When you visit another country, you have to buy things with the local coin.

But if you don’t think about it in advance, you’re likely to end up on the losing side of the exchange margin. (The exchange what now? Read on.)

To get the best deal, you need to know how to exchange foreign currency the right way—do your research first and show up with a strategy.

What determines currency exchange rates?

Currencies, like stocks and other financial products, are part of a 24-hour global marketplace known as Forex. As a result, the value of one currency relative to another fluctuates from minute to minute.

To make a profit on currency exchange, banks and other currency vendors sell money at a “daily rate” for more than they will buy. This is known as an “exchange margin.” There are usually service fees as well.

The margin and the fees are what you need to pay attention to in order to get the best deal on currency exchange.

Rule # 1: Never exchange currency at the airport

The convenience of airport currency exchange can be seductive. You think, “I’ll just get $50 worth of the local currency to tide me over.”

And then it’s time to go home and you reason, “This money is worth nothing in the US so getting something for it now is better than nothing.”

Don’t do it. The price for that convenience is too high. Airport currency kiosks, as well as those located near popular tourist areas, generally come with a larger exchange margin and more fees. If you changed dollars into the local currency when you landed in your destination airport, then changed your leftover foreign currency back into dollars before flying home, you’d end up losing money twice.

So what should you do with surplus currency?

Spend it—on breakfast, a magazine for the flight, something from the duty-free store. Donate it to UNICEF’s “Change for Good” program.

Twelve international airlines, including American Airlines, will collect your spare change on board. You can also send your donation in the mail once you get home.

Rule # 2: Compare exchange rates and buy currency online before you travel

Coinmill.com provides a currency exchange rate conversion calculator that is updated daily. Currencies from all over the world are represented. This is a good first stop to find out how much your dollars would be worth without the profit margin and extra fees.

BestExchangeRates.com shows current exchange rates and allows you to compare the rates offered by travel money and foreign transfer providers with average bank rates. Unfortunately, there is only one travel money provider currently listed on their site.

Travelex is featured on BestExchangeRates.com and generally regarded as the best in online currency sales. There are no extra fees, although you’ll have to pay for shipping if you get less than $1,000 in currency delivered. Store pick-up is free.

Travelex also offers a “cash passport” that works like a credit card and protects your balance in case of loss or theft. The cash passport does come with a few additional fees; however, it could be cheaper than racking up foreign currency transaction fees on your regular credit card.

Rule # 3: ATMs and credit cards offer convenience, but come with extra costs

ATMs

Withdrawing foreign currency from an ATM can be a better option than exchanging currency at a kiosk. But before you do it, ask your home bank about their policy on foreign transaction fees.

In almost every case, banks will at least charge you to use an ATM outside their network. The ATM may come with its own fee. If you’re going to get cash this way, get a large amount once rather than several small amounts over the course of your trip. That way you get the most money for the least fees.

Credit cards

Many people like to use credit cards when they travel, especially to avoid carrying large sums of cash.

But your credit card might charge you a foreign transaction fee every time you make a purchase. Those fees can quickly add up to a not-insignificant percentage of the overall cost of your trip.

Check out our best credit cards for international travel to make sure you’re getting a good deal. Many of these cards come with other travel-related benefits, such as insurance and discounts on travel-related expenses.

Summary

Currency exchange is a relatively simple process once you understand the basics. Plan ahead and save money by tracking exchange rates and shopping around for the best deal.

If you buy currency before you leave, you won’t be stuck with the unfavorable rates and exorbitant fees of airport kiosks and other tourist-targeted currency vendors.

Another advantage of buying currency in advance is the incentive to stick to a budget. Round out your strategy with a travel-friendly credit card and you can avoid the usual post-vacation financial hangover.

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About the author

Elizabeth Spencer
Total Articles: 42
Elizabeth Helen Spencer is a personal finance and travel writer based in the Philadelphia area. She holds an MFA in Creative Writing and still nurses a secret fiction writing habit on the side. When not writing for work or pleasure, she loves to sweat it out in a hot yoga class and find new books to read. Elizabeth lives with her husband and two children and has reached the conclusion that "having it all" is a myth.