The few seconds you spend thinking about it can feel like a lifetime as the waiter waits patiently to reclaim the card machine. Whilst it may seem a straight forward question, it’s important you choose the correct currency otherwise you could end up getting ripped off.
The Starling Bank experiment
‘This is Money’ recently published an article on their website about an experiment in which Starling Bank sent identical twins Heidi and Alice, 29, to Berlin for a weekend to find out if paying in pounds or local currency is most cost efficient. They made exactly the same purchases and using the same debit card, which charged no extra fees for spending abroad.
The only difference was that each time they used their cards, Heidi paid in the local currency, euros, whereas Alice paid in pounds.
The option to pay in sterling is known as dynamic currency conversion. Whilst it can be tempting as it means you’ll be able see straight away how much the transaction will cost you in pounds and pence, it also means that the foreign firms can use their own conversion rates. And these almost always work out as more expensive than if you had paid in the local currency and left it to your own bank or credit card provider to convert the cost.
This was the case for the twins. For every transaction, it worked out more expensive to pay in pounds. In the worst case, the difference was almost 10 per cent — which means you would lose £100 if you spent £1,000 over the course of your holiday.
Here are the cost conversions, according to Starling, of Heidi and Alice’s purchases:
(paid in euros)
(paid in pounds)
|€12.50||Box of chocolates||£11.09||£11.70||61p|
As you can see, in many of these examples the difference between paying in pounds and euros is just a few pence. But over the course of a holiday this can add up. In fact, according to The Telegraph, travel money firm FairFX estimate that these small amounts of lost money add up to cost British tourists around £500million every year.
At the end of the Berlin trip, Alice had spent a total of £317.73 — an extra £21.90 compared to Heidi.
While the difference here isn’t an enormous sum, it is an easy saving to make — all it requires is that you push a different button on the card machine.
Starling Bank’s research also showed that even if your debit or credit card charges a typical 2.99 per cent fee on spending overseas, it would still work out cheaper to pay in the local currency.
Should you pay in pounds or local currency?
You’ve guessed it – the correct answer is always to choose the local currency of the country you are in. So euros if you’re in the Eurozone, dollars in the U.S. and so on. When you pay in pounds, the foreign bank, shop or restaurant can set its own conversion rate to calculate your bill, which is usually much worse than the rate your bank would use.
So with that in mind, if you are heading off on holiday over the coming weeks, have a great time and don’t let hitting the wrong button on the card machine lead to you losing out on easy savings.
Remember, all exchange rates are subject to change from time to time without notice.
The information in this blog should not be regarded as financial advice.