Saturday, September 22, 2012

International Access to Money

Roughly 60% of Americans do not have a passport according to the State Department as of January 2012.  If you belong in that majority and plan on staying in it, this post will probably not be very relevant.  However, for those of us who do have a passport and plan on using it, we have to prepare before going abroad.  Especially within my age group, many students study abroad, backpack across a different continent over the summer, or even attend college in a different country.  For those of us who haven't, learning how to get access to money is the first step.

Bringing cash is the simplest way, but if you plan on staying abroad for an extended period, holding a few thousand dollars in bills may not be the smartest thing to do.  However, you usually need to exchange your domestic currency for the foreign currency abroad.  There are often exchange counters at the airports and train stations but these rates are not as favorable as if you exchanged your money at a bank or ATM.  They effectively charge you for the convenience, and it may be worth it for exchanging small amounts of money but try to stay away most of the time.

The preferred method to access cash internationally would be to use a credit card.  With a credit card, making large purchases become relatively simple and the exchange rate is generally very fair.  The exchange rates used by the large credit networks (such as Visa and Mastercard) are based on wholesale rates traded between banking institutions rather than retail rates offered to customers.  It is very important, however, to watch out for fees.  Most cards have a 1-3% foreign transaction fee which can be fairly expensive.  Interestingly enough, Capital One is well known to not charge any foreign transaction fees on their credit cards.  Going through my own portfolio of credit cards, I also would recommend Capital One over any other for international use, although there are better cards to maximize your rewards in the U.S.

If you do use a credit card, avoid cash advances.  The exchange rate wouldn't be an issue like I mentioned above, but you would immediately begin to accrue an incredibly high interest rate (usually higher than 20%).  If you need to get cash on the ground, use an ATM with a debit card.  With debit cards, however, it is extremely important to pay attention to all the fees.  Your bank will probably charge a couple percent in currency fees on debit purchases made internationally and a similar percent on ATM withdrawals.  There may be an additional flat fee of a few dollars for ATMs not on the same network as your card.

A prepaid card can also be useful to access cash outside of your home country.  They offer more security than your normal credit or debit card because they are not linked to your identity in case you lose them.  It can also be quickly replaced by whatever institution issues them.  If you do get a prepaid card, pay attention to the fees that you might incur for ATM withdrawals, closing out the card, or exchanging the remaining balance for a different currency (for example, if you want to change back the euros you put on it back into your home currency).

Another option is using a traveler's check but these are usually reserved for emergencies.  A traveler's check is a fixed-amount check which you could use to pay someone else.  In the past, traveler's checks were widely accepted by many businesses but have become unpopular after credit cards, debit cards, and ATMs.

Whatever method you choose to access funds internationally, make sure to always have a back-up plan.  While the fees charged for some of these services may be exorbitant, the cost of being unprepared is even greater.

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