Exchanging dollars for foreign currency can cost you a bundle. here's how to get the best rates

Bill Donovan

You've been planning your vacation for months, reading guidebooks and magazines, drawing up an itinerary, checking airfares and hotels. What's left to think about?Money. You might assume that exchange rates are similar no matter where you change your currency, but the way you convert dollars to pounds, punts, and francs can seriously affect the cost of your trip. Happily, there are a few basic rules you can follow to get the very best rate.

First things first: Avoid converting money before you leave the United States. The advantage, of course, would be convenience: you'd arrive at your destination with local currency in your pocket. Most major metropolitan banks exchange dollars for foreign currency, as do many travel agents, through a service called ezForex. And last October, Chase Manhattan Bank launched Currency to Go (www.currency-to-go.com), an online service that delivers any of 75 foreign currencies to your doorstep overnight, even if you're not a Chase customer. The only catch?According to Ed Perkins, consumer travel advocate for the American Society of Travel Agents (ASTA), you'll almost always get a terrible exchange rate.

Say you're traveling to Greece and you want to land with 100,000 drachmas. If you walked into a branch of the Bank of New York, one of the nation's largest banks, you'd pay $335 for them, based on the exchange rate in early March. A travel agent using ezForex would charge you $316. And if you went through Currency to Go, you'd pay $320, including a $10 shipping charge. None of those prices sound outrageous, until you check the wholesale rate: just $289.25. (The wholesale, or "interbank," rate is the one posted in the business section of most newspapers. It's what banks charge each other to convert large sums of money.)

The best option for obtaining cash abroad is to use your bank's debit card at an ATM upon arrival. There are now more than 800,000 ATM's worldwide, including locations in most international airports and on all seven continents (for the record, there's one at McMurdo Station in Antarctica), so you're almost certain to find one where you're going. The two major ATM networks—Plus, run by Visa, and Cirrus, run by MasterCard—both have online ATM locators, so you can verify there's one at your destination before you leave (www.visa.com for Plus, www.mastercard.com for Cirrus). Just be sure you have a four-digit PIN, and know it by numbers rather than letters—many foreign ATM's don't have letters on their keys.

Although you won't secure the wholesale rate using an ATM, you'll come close: Both Plus and Cirrus add a 1 percent conversion fee to the wholesale rate (for example, if you withdraw 500 deutsche marks, your account will be charged the U.S. dollar equivalent of 505 DM, converted at the wholesale rate). On top of that, your bank will usually charge an ATM fee of $2 to $3. Some charge more for overseas transactions, though, so call your bank before leaving to make sure its fee is not exorbitant.

Even paying a surcharge, you'll save over exchanging in the States. If you wait until you arrive at Hellinikón International to get those 100,000 Greek drachmas, you can go to the ATM there and withdraw that amount for just $295.14, including the 1 percent exchange fee and an ATM fee of $3. That's $20 to $40 less than you would have paid at home enough for lunch overlooking the Aegean.

Keep in mind that the per-transaction ATM charge means you're better off making a few big withdrawals rather than stopping every time you need cab fare. Also, because you might be out of luck if your airport's ATM isn't working, you'll want to know your options in advance. MasterCard's Web site tells you whether there's a Cirrus machine in a specific airport but not how many machines. The Visa site lists the total number of Plus ATM's (one in the Berlin airport, for example, and eight in Frankfurt's), and includes airport diagrams to help you find them.

Paying with a credit card is your next best option for obtaining favorable exchange rates. Visa, MasterCard, Diners Club, and American Express give you the wholesale exchange rate on purchases and charge a 1 to 2 percent conversion fee. Many Visa- and MasterCard-issuing banks will also tack on their own fee, so call your card's service center to find out how much it is. The nation's two largest card issuers, Citibank and First USA, both charge an extra 2 percent. Although that means paying with a credit card is usually a bit more expensive than using cash from an ATM—a 100,000-drachma purchase on either card would run $297.93—credit cards are still a good idea for important purchases, since you'll have some consumer protection in case of disputes with the payee.

As good as credit cards can be for purchases, though, avoid using them to withdraw cash from ATM's. Visa and MasterCard will give you the wholesale exchange rate plus the standard 1 percent conversion fee, but you'll also get slapped with a $10 or a 2 percent cash-advance fee, whichever is higher. What's more, your card issuer will begin charging you interest immediately, usually at a higher rate than for purchases. The interest rate will vary depending on your card, but the conclusion is the same: getting cash with a credit card is never a good deal.

Of course, there will be times when you can't find an ATM or an establishment that takes plastic. If you need to exchange dollars or traveler's checks abroad, try to use a bank. According to Fran Berndt, first vice president at Ruesch International (a company that handles currency exchange for many of the 90 major U.S. tour operators), hotels and exchange kiosks will just about always give you worse exchange rates. Why?As intermediaries in the process, their insurance and handling costs are greater, so they must skim off a little more of your money to turn a profit. If you want to comparison-shop around town, look at the difference in the posted buy and sell prices (called the "spread"). The larger the spread, the worse the deal for you.

Finally, make sure you don't get stuck with a lot of foreign currency at the end of your trip. Every time you convert money you pay, so you'll take another hit changing your cash back to dollars. And most places will exchange only paper money, not coins. "If you're not planning on being back in the country soon, converting the money is better than leaving it in a drawer somewhere," says ASTA's Perkins. "But you might not like the exchange rate."

Some people get around this problem by blowing whatever they have left at the airport duty-free store. But here's a better way: Set aside just enough currency to leave the country (cab fare, exit taxes, and so on). Then take the rest, put it toward your hotel bill, and pay the balance with your credit card. You'll receive an excellent exchange rate and avoid wasting a single franc.

Stretching Your Dollar in Europe

Whatever method you choose to exchange your money, the strength of the dollar versus foreign currencies can significantly affect how far your money goes. This summer, Europe is a particularly good deal. Since the euro's much-hyped launch on January 1, 1999, the currency has slowly but steadily lost ground against the dollar. The result?"Europe is on sale right now," says Ruesch International's Fran Berndt. The euro's decline means everything you do in the 11 euro countries — Austria, Belgium, Finland, France, Germany, Holland, Ireland, Italy, Luxembourg, Portugal, and Spain — now costs about 18 percent less than it did at the start of 1999. And you need not pay in euros to reap the benefits, since local currencies are tied to the euro's rate.

If you're traveling outside the euro zone, will your dollar go as far?Not quite. Although all European currencies have lost ground against the dollar in the past year, only two have fallen as dramatically as the euro: the Greek drachma, down 19 percent, and the Danish krone, down 17 percent. Norway, Sweden, and Iceland have done better; they're down 9 percent, 7 percent, and 6 percent, respectively. You'll save the least over last year in Britain; the pound is currently the strongest European currency, having fallen just 5 percent since January 1999.