Getting the most out of your money when you exchange can make your holiday budget go further.
In this article, we share our top currency exchange rate tips and advice, from the best place to make your exchange to common mistakes you should avoid.
What is exchange rate and how does it work?
Put simply, the exchange rate tells us how much of one currency we can exchange for another. In the past, many currencies’ value was tied to the value of gold and each note would have equitable worth in the precious metal.
As economics advanced and inflation crept in, this system became outdated for major economies like the US by the 1970s.
Exchange rate models
Now, currencies’ worth is determined using one of two models.
Countries that are less developed or economically volatile will have a pegged exchange rate, where the value of their currency against others is set by the government.
Why do I need to exchange my currency?
Across the world, a whopping 180 currencies are recognised by the UN as legal tender.
The four most widely used are the US dollar (USD), the Euro (EUR), the Japanese Yen (JPY) and Great British Pound (GBP). And while some countries, such as many EU member states, use the same currency as part of a ‘currency union’, it's unlikely you’ll be able to use your home country currency when travelling abroad.
Our top foreign exchange rate tips
Compare before you buy
By now, most of us know it’s sensible to shop around for things like car, home and travel insurance to get the best deal. But did you know you should be doing the same when you exchange currency? Grabbing your dollars, euros or dirham from the first place you see could lose you a fair bit of money.
If you’ve booked your break through a travel company that also offers exchange services, it’s tempting to go for the easy option and get your travel money from them.
In fact, shopping around before you exchange your currency is one of our top tips and can ensure you get the best deal and maximise your holiday spending money. Fees and commission can significantly reduce the amount you get in your pocket by as much as £50 (depending on the exchange rate).
There's just one thing to consider when shopping around: not all currency firms are authorised by the Financial Conduct Authority (FCA), as they’re viewed as a ‘goods seller’ rather than a financial services provider. This doesn’t mean they’re not trustworthy, but it does mean that you could lose your money if they suddenly become insolvent.
It's not always better to exchange before you fly
While getting your notes before you leave will give you peace of mind, it’s not necessarily the way to secure the best deal. In many countries, you’re likely to get more for your home currency once you arrive – just make sure you avoid airports and unreliable vendors and choose somewhere trustworthy, such as a bank.
If you’re travelling with a popular currency such as US dollars or GBP, you’re unlikely to have issues exchanging your currency once you touch down. Make sure you check before you travel, though; it will be harder to exchange in rural areas or if you’re travelling with a less frequently used currency.
You may not need to take cash
Exchanging your currency is not a completely stress-free experience. If you make the switch before flying, you’ll need to keep a significant amount of cash safe during your journey. And even if you opt to do it once you’ve arrived, it can be stressful ensuring your entire holiday budget doesn’t get misplaced or stolen. What if you didn’t have to carry cash at all?
Some banks, such as Monzo and Starling, do not charge their customers fees for using their cards abroad. Others, like Halifax, offer certain types of no-fee debit or credit cards that are aimed at frequent travellers. But you don’t need to change your entire current account to use a card on holiday without massive fees.
You can choose a pre-paid travel card instead, which you can use in the same way as a credit or debit card, in your chosen currency.
Be warned – some banks charge up to 6% for every international purchase or withdrawal, which will add up to a significant amount over your two weeks in the sun. Additionally, some countries have a primarily cash-based economy, so make sure you know where to make withdrawals at your destination.
You can find out more about fees for using your card abroad in our previous article.
Look for a buy-back guarantee
If you’re not sure you’re going to spend all your cash, keep your eyes peeled for a buy-back guarantee.
Some currency exchange companies allow you to lock in the exchange rate you bought at. When you return from your trip, you’ll be able to sell your unwanted dollars or euros back, usually without any commission fees.
A buy-back guarantee isn’t always worth seeking out. It’s less important if you’re relatively confident you’re going to spend your currency, or plan to return to the same country/region in the next few years. But if you’re confident you won’t spend all of your money, or are dealing in a currency that’s prone to large fluctuations, a buy-back guarantee is worth seeking out.
Don’t leave it until the last minute
Sorting out your currency should be a key part of your holiday preparations, even if you’re not planning on exchanging before you leave, or at all.
Leaving it until the last minute and panic-buying will stop you accessing the best rates and deals. At best, you may have to exchange your money at the airport – known universally as the place with the poorest exchange rates.
And at worst, you could find that your destination has no places to exchange currency, leaving you at the mercy of extortionate international card fees.
Before you set off, it’s vital that you’ve got the right travel insurance policy in place to make sure your holiday is a happy and healthy one.
If you found our tips and advice above helpful and you’re looking for assistance, you can find an expert financial adviser near you at unbiased.co.uk.