Everything You Need To Know About Paying For Things On Your European Vacation

If you decided to finally take that European vacation this summer, smart choice. On average, the cost of a trip to the Continent is 11 percent cheaper this year compared with last year, according to TripAdvisor’s annual TripIndex Europe data. That’s because the U.S. dollar is stronger relative to the euro, and prices have come down at many destinations in Europe.

But you don’t want to wipe out those savings by making the wrong moves when it comes to paying for expenses and purchases on your trip. Here’s what you need to know.

Use A Credit Card Whenever Possible

“Credit cards should be your first line of defense on your trip,” says George Hobica of Airfarewatchdog. “They offer the best exchange rate for consumers, plus the benefits of reward points and fraud protection.”

Hobica is right: You’ll save the most when you pay for purchases abroad with a credit card. That’s because your credit-card issuer will use the spot exchange rate -- the one quoted in the financial markets -- or something close to it to convert your purchases from the foreign currency into dollars, says Greg McBride, chief financial analyst at Bankrate.com. But the spot-exchange rate is just a baseline, he adds. The rate you will pay as a consumer will always be higher than the market exchange rate. The key is to minimize the difference between the two.

Here’s an example: Tuesday, the spot exchange rate for euros to dollars was 1.1195, meaning 100 euros were worth $111.95. As a consumer, you want to pay as close to that rate as possible. The same day, Visa’s exchange rate for currency conversions on its credit cards was 1.1224, so a purchase of 100 euros would be converted to $112.24 by the company. That’s a relatively tiny surcharge over the market rate -- unlike the huge surcharges you’ll see when exchanging cash, as explained below.

Make Sure You’re Not Charged A Foreign Transaction Fee

You do have be careful which credit cards you use while traveling abroad, says Matt Schulz, senior industry analyst at CreditCards.com. Many tack on a foreign transaction fee of 2-3 percent for each purchase you make, which will render a great exchange rate irrelevant. The good news is there are plenty of great travel credit cards available now that don’t charge any foreign transaction fees at all, such as the Capital One Venture Rewards Card (which has an annual fee of $59, waived the first year). You can find a list of cards that don’t charge foreign transaction fees at CreditCards.com.

And be sure to let your card issuer know where you’re going before your trip, says Tom Meyers, editor of EuroCheapo.com. That will ensure your card doesn’t get turned away because your bank sees foreign purchases as suspicious activity.

Just Say No To ‘Dynamic Currency Conversion’

When you do use a credit card abroad, you might be asked by a merchant whether you want to convert the price into dollars before charging your credit card. Don’t take the bait.

“With the dollar as strong as it is, that option can be tempting,” Schulz says. “But it’s always a bad deal. You’ll get a lousy exchange rate, plus a bunch of fees added on for the ‘service.’”

The local currency is always the default -- leave it that way. Let your credit-card issuer handle the conversions.

Get A Chip-And-PIN Credit Card Before You Go

While Americans still mostly use credit cards that encode their data on magnetic strips, Europe and much of the rest of the world have moved on to a new type of card that stores that information on embedded security chips (in addition to the magnetic strips). This chip card also typically requires the employment of a personal identification number that the user must enter to complete a purchase. Chip-and-PIN cards are more secure than their predecessors, and they’re common throughout Europe.

While most merchants in Europe will still accept credit cards with just magnetic strips, some vendors, especially with ATMs at fuel pumps or train-station kiosks, will accept only chip-and-PIN cards.

Check with your bank or credit union to find out whether it offers a chip-and-PIN card for customers. Alternatively, sign up for the Barclaycard Arrivals Plus World Elite MasterCard, a favorite among elite travelers in the know. It’s one of the few chip-and-PIN cards available to Americans; it doesn’t charge foreign transaction fees; and its rewards are stellar (you earn two miles for every dollar spent, plus an additional 40,000 miles after you spend $3,000 in the first 90 days). It does come with an $89 annual fee, but it’s waived the first year.

Don’t Exchange Money Before Your Trip

Of course, you’re still going to need cash for smaller purchases or when a credit card isn’t accepted. But hang on to your U.S. dollars until you reach your destination. If you walk into your bank at home and convert your currency, the bank is going to levy a hefty surcharge for the privilege.

Remember the exchange rate for euros to dollars Tuesday was 1.1195. But if you had walked into a Chase bank branch the same day and attempted to buy 100 euros with dollars, you’d be offered an exchange rate of 1.1798. Translation? The 100 euros that are worth $111.95 would cost you $117.98 at the bank. Currency-exchange companies such as Travelex are even worse: The same day, Travelex charged a whopping 1.2345 rate, or $123.45 for 100 euros.

“Banks charge a lot for exchanging money,” Airfarewatchdog’s Hobica says. “So however strong the dollar may be, it will be wiped out by the poor exchange rate if you get cash at home.”

Bankrate.com’s McBride agrees. “When you’re changing money, you want to limit the haircut you’re going to take. You’ll get a better exchange rate the closer you get to your destination,” he says.

That doesn’t mean you should change money at a kiosk the instant you arrive at Heathrow. Money-changing kiosks and tellers at airports and other highly trafficked tourist sites will add hefty surcharges and offer the worst rates. If you do have to use a money-changer, wait until you’re in town or at least away from the most touristy destinations.

Check The Rates Offered By Local Merchants

“I’ve found that the most competitive exchange rates are often at storefronts,” McBride says. “Merchants often offer very competitive exchange rates with no fees. The have an incentive, because then you’re standing in their store with a pocket full of cash. So you’ll find competitive rates there as a way for them to boost sales.”

But don’t fret too much about it, either. If you need to change a few dollars at the airport or hotel so you have the currency when required, that’s fine. “The idea is that you want to limit the haircut you’re going to take when you change money, but you don’t necessarily want to waste your vacation searching for the absolute best one,” McBride says. It’s a good idea to have a currency-exchange application such as XE Currency on your mobile device so that you can make live comparisons both when changing money and spending it.

Stick To ATMs For Most Cash Withdrawals

After credit cards, you’ll get the most favorable exchange rate when you withdraw money from an ATM machine in Europe. The key to saving money is in limiting the fees you’re charged for the service. If you’re a premium customer, talk to your bank before you leave, says Brian Kelly of The Points Guy. Banks will often waive any ATM fees for their premium clients. (If you do rely on ATMs for cash in Europe, request a second card from your bank in case the first gets eaten by a machine or lost.)

If you’re not a premium client, find out whether your bank will charge a foreign conversion fee, which can be as much as 3 percent, and a flat fee per transaction, usually up to $5, for withdrawing money from a foreign ATM that’s not in its network. And, remember, the foreign bank whose ATM machine you’re using could also charge you a fee. For a list of the best and worst U.S. banks for withdrawing money from ATMs abroad, visit The Points Guy.

If your bank is in the Global ATM Alliance, you can save a bit. This worldwide association of large banks will waive fees and allow free ATM withdrawals when you use ATMs within its network. Bank of America is in the alliance, but note that it will still charge you a 3 percent conversion fee even if you use an ATM machine within the network.

If you’re flexible, your best bet is to open an online checking account with Charles Schwab Bank. There’s no charge to open the account, it requires no minimum balances and Schwab won’t charge you a penny, such as currency conversion fees, when you use any ATM anywhere in the world. It will also reimburse any foreign bank ATM fees the other bank charges. That’s a pretty sweet deal -- whether you’re at home or abroad.