Dynamic Currency Conversion - Don't be tempted to pay in your HOME currency

Summary

When traveling abroad, paying in your home currency through Dynamic Currency Conversion (DCC) may seem like a way to avoid foreign transaction fees. However, DCC often results in higher costs due to poor exchange rates and added markups. By choosing to pay in the local currency, travelers can avoid these hidden fees and often end up paying less. Examples from Dubai and Europe demonstrate that DCC can increase costs by 3.9% to 6.5%, while using local currency results in a more favorable exchange rate and lower final costs. Always opt for local currency to save money.

Takeaways

• 😀 Always choose to pay in the local currency when traveling abroad to avoid unnecessary extra charges.
• 😀 Dynamic Currency Conversion (DCC) lets you pay in your home currency at the point of sale, but it often results in worse exchange rates and higher fees.
• 😀 When you opt for DCC, you might assume you're avoiding foreign transaction fees, but the exchange rate markup often costs you more.
• 😀 DCC may include a hidden markup fee higher than the typical 2.5% foreign transaction fee from your credit card provider.
• 😀 Your credit card company may still charge a foreign transaction fee, even if you choose to pay in your home currency.
• 😀 DCC can lead to higher overall costs, with extra charges that can range from 3.89% to 6.47% more than paying in local currency.
• 😀 Paying in the local currency means your credit card handles the currency conversion, often at a better exchange rate.
• 😀 Merchants offer DCC because they profit from the spread between the actual exchange rate and the inflated rate used during the conversion.
• 😀 Most consumers are unaware of the uncompetitive exchange rates offered by DCC, which makes them more likely to choose the familiar home currency option.
• 😀 In scenarios like shopping in Dubai and Europe, DCC can be up to 5% more expensive than paying in local currency, leading to significant overpayment.
• 😀 Always check the exchange rate being offered through DCC and compare it to the rate your credit card company uses to assess if it's a good deal.

Q & A

What is Dynamic Currency Conversion (DCC)?

Dynamic Currency Conversion (DCC) is a feature offered by some merchants that allows customers to choose to pay in their home currency instead of the local currency at the point of sale when traveling abroad.

Why do merchants offer Dynamic Currency Conversion (DCC)?

Merchants offer DCC because they make a profit from the markup on the exchange rate, which is shared with the company providing the payment terminal.

What is the main risk of using Dynamic Currency Conversion when traveling?

The main risk of using DCC is that it often results in a worse exchange rate, higher markup fees, and the possibility of still incurring foreign transaction fees, making the transaction more expensive than paying in the local currency.

How does paying in the local currency compare to paying in your home currency using DCC?

When you pay in the local currency, your credit card company applies a more competitive exchange rate, which usually results in a lower final cost. Paying in your home currency through DCC often leads to higher costs due to unfavorable exchange rates and additional fees.

What fees are involved when paying with Dynamic Currency Conversion (DCC)?

When using DCC, you may face unfavorable exchange rates, a markup fee (often higher than the typical 2.5% foreign transaction fee), and sometimes, your credit card issuer may still apply a foreign transaction fee on top of that.

Can paying in my home currency save me money on foreign transaction fees?

Not necessarily. While paying in your home currency might seem like it will save you the typical 2.5% foreign transaction fee, you could end up paying more due to higher exchange rate markups and additional charges applied by the merchant or payment terminal provider.

What was the total cost of a 50 AED item in Dubai when paying with DCC, and how did it compare to paying in local currency?

When paying with DCC, the total cost was either 18.96 CAD or 19.43 CAD, depending on whether the foreign transaction fee was applied. Paying in local currency (AED) resulted in a cost of 18.25 CAD, which was cheaper by 3.89% to 6.47%.

What exchange rates were involved in the Dubai example, and how did they affect the total cost?

The exchange rate used by the payment terminal was 0.3792260, which was significantly worse than the rate used by the credit card company (0.3561). This led to a higher final cost when using DCC.

How did the European example demonstrate the impact of Dynamic Currency Conversion (DCC)?

In Europe, a €79 Scotch purchase would have cost 122.1 CAD using DCC, compared to 117.18 CAD when paying in euros through the credit card company’s conversion. The DCC option was 2.3% to 4.9% more expensive due to unfavorable exchange rates and additional fees.

What is the key takeaway regarding Dynamic Currency Conversion when traveling abroad?

The key takeaway is that you should always choose to pay in the local currency. This allows your credit card company to apply a better exchange rate, avoiding extra fees and markups typically associated with Dynamic Currency Conversion.