Going on a vacation can be exciting: the thoughts of seeing an enticing destination, catching up with old friends, or simply enjoying a new experience. Unfortunately, this comes with a price tag.
High annual inflation has already made an expensive beginning to 2023, and travel isn't immune. Many people planning trips are concerned about this inflation impact on travel costs and wish to save money before take-off.
With travel becoming increasingly expensive, savvy travelers are looking for different ways to save money on travel costs - and one way that all travelers can save money is by paying extra close attention to overseas payment fees.
Whatever payment method you use when paying for travel will have some extra and possibly unexpected fees attached to it. In this post, we will break down what these are and offer some tips on how to best reduce them.
We will start examining credit card fees as this is a very common way that travelers often pay for their vacations.
International Credit Card Fees Examined
When spending on travel using a credit card, the following fees may apply:
- Spending fee: This is applied every time you use your card abroad. Some providers charge a flat fee (which can sometimes be more expensive than the item you are buying!), whereas others charge a percentage.
- Load fee: This is applied every time you make a purchase abroad and the local currency needs to be converted into the currency of your home country.
- Foreign exchange transaction fees: Also known as Foreign Currency Conversion mark-up, this fee is charged by the card issuer and is usually around 2.5% of the transaction amount.
When you make a purchase abroad using your card, you will pay foreign exchange fees as well as interchange fees which will usually amount to around 3.5% of the transaction amount. Over a long or expensive trip, a 3.5% "card tax" can soon add up. However, here are five tips to save on international credit card payment fees:
1. Avoid Foreign Transaction Fees
Some banks and credit card companies offer cards that do not charge foreign transaction fees. It is worth taking the time to try and find out which lenders are offering these, and if you may be eligible.
Do note that applying for a new credit card can at times, take a week for approval, and card delivery can take up to two weeks. So keep these options in mind well before the start of your next trip.
2. Always Choose To Spend in the Local Currency
Whenever you make a purchase on a credit card, you will have the option to pay in the local currency or in your native currency. Always choose to pay in the local currency. Choosing this option ensures that the foreign currency conversion will be handled by your bank or credit card company. The alternative is that the "point of sale" will set the exchange rate, and the foreign currency markup can sometimes run up to 10%!
3. Pre-pay Your Credit Card Before Travel
While credit cards can be a highly cost-effective way to make international payments, if you forget to clear the balance before the payment due date, then interest will be added to the balance. As credit cards typically come with an APR anywhere between 15% - 30%, paying interest will completely undermine the savings you might have made by paying on a credit card.
Therefore, the best way to avoid interest being added to your balance is by prepaying your credit card before traveling. That way, whenever you use your card, you will be using your own money and simply reducing your own positive account balance.
Of course, you may not know just how much money you will need on your trip and how much of a positive balance to create. Still, make a rough budget estimate and then add 10% extra on, and you should be OK.
4. When Using ATMs
Withdrawing cash on a credit card is usually a bad idea as even domestic cash drawdowns often come with fees, and higher interest rates. As such, try to avoid withdrawing cash on your credit card when traveling as much as you possibly can.
If you do need to withdraw cash on your credit card, though, you may be able to reduce cash advances and ATM fees by making withdrawals from an establishment or ATM which is linked with your financial institution. You can often identify linked institutions by going through your card issuer's terms and conditions.
Most banks, these days, have alliance partner banks in countries all over the world. If you can locate an ATM from your bank network, you can then make use of these partner ATMs to withdraw money.
Using a Bank Account as Payment Method
Paying for purchases by way of bank transfer is rather uncommon these days owing to the prominence and convenience of debit cards.
However, when making international and foreign currency payments, paying by way of bank transfer can prove to be very cost effective. As such using bank transfer as a payment method for travel is certainly worth bearing in mind, as we shall now demonstrate.
Whenever a bank processes a foreign transaction, they charge a transaction fee. This fee does vary from bank to bank, but in the US the range is between $2.75 - $50. The bank then applies a foreign exchange mark-up which is typically between 2% - 4% above the standard market rate.
Let's look at an example;
Cost of Holiday = $1,000
Bank Transaction Fee = $15
Foreign Bank Transaction Fee = $15
Mark Up of 3% (calculated on) $1,030 = $30.90
TOTAL COST = $1060.90
Because of the fixed transaction fees, paying for travel by way of bank transfer is only really suitable for making larger purchases such as paying for hotels or organized tours.
Foreign transactions always come with fees attached. Perhaps the fin-tech sector will one day disrupt this, but for now, all any traveler can do is try to understand the various fees and charges and look for ways to minimize them.
While credit cards can be an effective means of paying for travel, it depends in the exact terms, conditions, and fee scales of the account and on whether you trust yourself to clear the balance before the payment due date.
Bank transfers, on the other hand, do have fixed fees attached which can make it a counter-cost effective means for making smaller purchases but is often an excellent way to pay for larger travel costs.