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As a traveler, you can't ever come out ahead on a foreign exchange transaction, but you can often come out close to even. And, overall, credit cards and debit cards are the best way to exchange: With a no foreign transaction fees credit card, you might not get penalized at all.

Your exchange benchmark is the "bank rate" that you see on the financial pages. Bank rates are not fixed by government negotiation; they "float" and fluctuate like stock or oil prices, but the daily variations are usually much smaller.

When you travel outside the U.S., you basically have four options for getting local currency....

1. Use No-Fee Credit Cards

When you use your regular travel rewards credit card outside the U.S., you lose no more than 3%. And with some cards, you lose nothing.

Most of the developed world now accepts plastic from the big worldwide issuers. When you put a foreign-currency charge on a MasterCard or Visa, the merchant submits the charge to its bank in local currency, the merchant's bank sends the charge along to your issuing bank through the MasterCard or Visa network, the network converts the currency, and it posts the charge to your bank in dollars for entry on your account.

For completing the transaction, the network assesses a conversion fee of about 1%. American Express and Discover run independent networks that work in about the same way. So, under good conditions, on a foreign charge, credit cards are probably the best way to pay non-trivial local charges ranging from restaurant bills and rail tickets up to big hotel and airline charges.

Although processing a foreign charge entails absolutely no incremental cost to your bank, some banks in the U.S. add surcharges to foreign transactions—even when the charge is in U.S. dollars. Typically, that surcharge is 3%, i.e. 1% to the network for making the exchange and 2% to the bank for doing nothing. Even though a bank surcharge is a gouge, however, an overall loss of 3% is still a lot better than you get exchanging cash.

You can do better. Quite a few travel-oriented credit cards add no foreign exchange fee. For years, CapitalOne had the "no exchange fee" market niche to itself, even absorbing the 1% network fee. But starting around 2010, other big U.S. banks suddenly caught on and started issuing at least some cards with no fee or only the 1% network charge. So you now have a range of cards that limit your loss to a minuscule 1% of the charge--a big win for travelers.

But beware two pitfalls. Do not use a credit card for cash. Card issuers treat that as a cash advance and start the meter running on interest and other unfavorable results. And do not be conned into having a merchant bill you in dollars: The merchant will convert the bill to dollars at a really bad rate, and you'll still pay any conversion fees your bank might charge.


Related: The Credit Cards You Need for Overseas Travel


2. Debit Cards for Local Cash

No matter how much you can put on a credit card, you still need some local currency. And using a debit card at a local ATM is the best way to get local cash—if you use the right debit card and the right ATM.

Typically, U.S. banks add a transaction fee of $3 to $5 to every withdrawal at an ATM not operated by the bank or a partner, whether in the U.S. or a foreign country. And some local banks add their own fees. But you can avoid most of those fees by choosing and using the right debit card or the right ATM.

Debit cards issued by many savings banks, credit unions, and online banks do not charge any fees for ATM withdrawals anywhere, and some also absorb a limited number of fees imposed by foreign banks. USAA, as an example, adds only the standard 1% network exchange fee to up to 10 ATM withdrawals anywhere during each billing cycle (typically a month). Many credit unions do the same.

Check with any bank where you have an account: If it doesn't offer no-fee foreign ATM withdrawals, consider opening a no-monthly-fee, no-minimum-balance account with a credit union and use that account for foreign travels. And if you're opening a no-fee account, apply at a bank that issues ATM cards with chips. You probably won't need to use a chip-and-pin card anywhere, but having one available is worthwhile.

Bank of America belongs to the "Global ATM Alliance" of banks that do not add withdrawal fees at member-bank ATMs. The Alliance includes Scotiabank in Canada, Chile, Mexico, Peru, and much of the Caribbean; Barclay's in the U.K.; BNP Paribas in France; Deutsche Bank in Germany and Spain' BNP d'Italia in Italy; Westpac in Australia and New Zealand; ABSA in South Africa; UkrSibbank in Ukraine; and TEB in Turkey. But Bank of America does add a 3% exchange fee. And avoid using a Bank of America debit card at a non-Alliance bank: You will pay both a stiff withdrawal fee and that 3% exchange charge.

For ATMs, you're usually OK using your no-fee ATM card at any big-name local bank's ATM. In most of the world, ATMs display instructions in several languages, of which English is always an option.

But beware one widespread scam. Many big foreign gateway airports have cut deals to give exclusive ATM installations to retail exchange outfits such as Travelex. These ATMs tout "no fees," but they give you the same lousy retail exchange rate that the exchange desks do. They're easy to spot because all the ATMs at the airport are the same. If you arrive without any local cash, try to use a credit card to get into town where you can find the genuine bank ATMs.

3. Buy Foreign Currency Before You Go

You can buy most foreign currencies before you leave home. That way, you won't arrive at a destination with no local money, but that convenience comes at a cost—sometimes a stiff cost.

Some retail U.S. banks exchange currencies, but the exchange rates are usually not very good. Currently, for example, Bank of America sells Euros for about five percent above the bank rate. That's probably par for the course, although quite a few big U.S. banks no longer deal with retail currency exchange.

Buying foreign currency with dollars at an exchange booth at a U.S. departure airport is even worse. Typically, airport exchange bureaus mark up the currency by as much as 15%, and maybe add a fee to that. A travel industry mantra goes: "An airport is the worst place to exchange currency." Similarly, those "handy" packs of currency "so you have some on arrival" are, in fact, handy, but the exchange rate is usually lousy.

Keep in mind that most foreign exchange outlets quote rates in the direction opposite to the way you normally think. Instead of pounds/euros/yen/simoleons per dollar, you see dollars per unit of foreign currency. So if the pound bank rate is, say, $1.25, what you need to know about a posted rate is how close it comes to the equivalent bank rate of 0.80 pounds.


Related: The 4 Credit Cards You Should Keep and Why


4. Exchange Cash at Your Destination

Exchanging currency usually means accepting a bad exchange rate. You're likely to lose anywhere from around 5% to more than three times that.

For years, ordinary travelers exchanged currency at a foreign destination by handing some of their home country currency to a bank or exchange bureau that exchanged it for local currency. And for years, banks and exchange bureaus gouged travelers with bad rates. In the past, travelers also bought travelers' checks, which didn't help on the exchange rate but did prevent loss if the checks got stolen or lost. Although nobody wants travelers checks anymore, exchanging greenbacks still works, but exchange can be expensive:

  • Buying local currency with cash at an arrival airport is just as bad as buying it at a U.S. departure airport. That travel mantra applies to both departure and arrival airports.
  • Rates at street exchange offices in foreign countries are a crapshoot. Shopping around can be a hassle, and most of the time, the combination of exchange rates, fees, and "service charges" amounts to a bad deal. You can sometimes run across a reasonable deal, but unless you have advance information, you can't count on it.
  • Some hotels exchange currency and post rates—usually really bad rates that are worse than you get at exchange bureaus.

And you can't count on the longstanding urban legend that U.S. currency is welcome everywhere. That was true a few decades after World War II, and is still true in a few countries with weak currencies and high inflation rates. But in most of the world, locals don't want the hassle of dealing with dollar currency—and if they do accept dollars, you can bet they will convert at a bad rate.

Intro image by AB Visual Arts via Shutterstock

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