What is... | August 7, 2011

What is travel money?

As millions head to foreign climes for their summer vacation, many will be thinking about the best ways to pay for goods and services abroad. The various ways of changing domestic money into a foreign currency each have different costs – and degrees of effort – involved.

Travel money is an area where careful research, carried out ahead of time, can really pay dividends.

Cash rich
The first and simplest option is to buy foreign cash. But where is the best place: at home or abroad; in a bank or bureau de change; or just using an ATM machine? It is important to remember that there can be two costs associated with changing money: a fixed commission fee and the actual exchange rate itself. Some institutions offer “commission-free” exchange but may charge an inferior exchange rate to a rival. For example, changing €300 at $1.35 per euro with a €5 fixed commission fee will leave the traveller worse off than changing at a fee-free rate of $1.33. In this case, the first option yields $398.25 and the second $399.00. 
Travellers should also consider using cash rather than a card to buy travel money – even in their home country. A BBC Watchdog report last year claimed some debit card fees count bureau de change transactions at home “as if you’ve taken money out of a cash machine abroad”.

Money in a hurry
Holidaymakers will typically get a better deal by shopping around for a good deal in their high street rather than buying last-minute cash in an airport. Economist Tim Harford explained in his book The Undercover Economist that coffee from kiosks in train stations cost more than from shops in nearby streets because of their location.The same rationale applies to bureaux de change in airports. If you have no foreign cash and are about to catch a plane your options are limited.

Home and away
For similar reasons it can be better to change money at home than abroad, where we are likely to have less knowledge about the market and may suffer from language barriers.

Mix and match
A useful alternative is to buy travellers’ cheques at home, usually in US dollars, euros or UK pounds, which can be exchanged in a local bank. They are widely recognised as being more secure than cash but they can be cumbersome to use. Other options include credit cards and pre-paid cards but, like travellers cheques and cash, check out fees and commissions. For credit cards in particular, it can be difficult to know how much you are charged until you get home as one-off fees and exchange rates can vary between providers and between ATM withdrawals and purchases in shops and restaurants. A combination of travel money – say, a mixture of cash and cards – can be a good bet.

One currency, no hassle
Perhaps the best holiday money tool is a single currency as US citizens travelling to another of the 50 states and Eurozone vacationers holidaying in a fellow single currency nation can testify.

Phil Thornton
Phil Thornton

Lead consultant at Clariti Economics