It’s no secret that Aussies love to travel. Whether it’s exploring our own backyard or heading off overseas, we enjoy discovering new places, cultures and experiences. Not only is travel a source of pleasure and relaxation, but also a great way of learning and connecting with others. During the COVID lockdowns we could only travel locally, so there was no real need to worry about foreign currency. In fact, we spent $27.8 billion in the September quarter 2022 on local travel. Now the world is open again, we need to think about debit cards and how they can be used for foreign currency transactions.

When you do jet off abroad one of the things you’ll need to consider is how you’re going to pay for things in the local currency. You really don’t want to be stung with nasty currency conversion fees. For most people, we usually have 3 main options: Debit Cards, Travel Money Cards and Credit Cards. Depending on your travel needs you may choose a combination of all three!

If you’re travelling to a country that is predominantly cash-based, then an advantage a debit card has over a credit card is that you’ll be able to withdraw your own money. If you do this on a credit card you’ll cop a “cash advance” which will start hitting you with interest the moment you withdraw the cash.

What exactly is a “foreign currency conversion fee”?

In a nutshell this is the charge that your bank or debit card company applies when you use your card to pay in a different currency than Australian dollars. If you’re tapping away these can add up very quickly

These are usually charged as a percentage of the transaction amount, ranging from 1% to 3.5%. For example, if you buy something online for $100 USD and your card charges a 3% foreign currency conversion fee, you’ll end up paying $103 USD plus the exchange rate difference and then converted back to AUD on your account.

Some cards may also charge a flat fee per transaction, such as $2 or $4, which can be a significant chunk if you’re making smaller purchases.

This can also apply to online purchases. Many foreign web sites do not accept Australian dollars for payment so you should check where the site that you’re buying from processes their transaction. For example, Ancestry.com.au will process your transaction in Ireland.

Check what your debit card offers

The fine print of your debit card will tell you what fees you’ll be charged for overseas transactions. As you might know this can also carry some dangers, along with some unexpected charges. If there is a lot of spending on a debit card in a foreign currency then it may be a good idea to use a specialised pre paid debit card for that foreign currency.

The way in which debit cards work means that they are very much suited to foreign currency transactions. Debit cards, like credit cards, pay for a transaction in the currency of the merchant and will charge for the transaction in Australian dollars. This is one massive advantage of debit cards, in that there is no need to exchange money before buying a good and a person buying the good with the credit card gets charged the same price that a person who would buy the good with local currency would get charged, rather than getting charged a higher price if the shop “accepts Australian dollars”.

Market rate vs Swap rate

Exchange rates are also an issue with debit cards. There are two types of exchange rates you should know about: the market rate and the swap rate and you’ll need to check if your debit card provider charges exchange rates usually at a daily basis. These exchange rates are not very competitive, although they may be favourable compared to airport exchange rates. This is because they use two different methods.

The market rate(also known as the interbank rate or the mid-market rate), is the midpoint between the buy and sell prices of two currencies on the global market. It’s the rate that banks and other financial institutions are able to use to trade currencies with each other, and it’s constantly changing due to supply and demand, economic conditions, political events and other factors. The market rate is the most accurate and fair representation of a currency’s value at any given time. This is most probably what you’ll be offered on your debit card.

We’ll now move onto the swap rate. The swap rate is also known as the retail rate or the customer rate, is the rate that you get when you exchange currencies with a bank, a money transfer service, a travel card provider or a foreign exchange bureau. The swap rate is usually different from the market rate, because it includes a margin or a mark-up that the provider adds to make a profit. The swap rate can also vary depending on the type of service, the amount of money, the payment method and the destination country.

Some debit cards, such as Wise Travel Card, Revolut Australia Card or HSBC Everyday Global Debit Card, allow you to hold multiple currencies in one account and convert them at the market rate with a small fee.

If you’re a frequent traveller make sure to compare different providers and services, and use a debit card that offers low or no fees for foreign currency transactions and ATM withdrawals.