No commission, buy rate, sell rate, transaction fees, dynamic currency conversion (DCC) and other terms relating to exchanging currencies are how money changers make money.  No matter how hard travelers try, there is no avoiding exchange fees.  iKangaroo has compiled a list of things-to-know before and after starting your travels to help save money and the feeling of being ripped-off at every purchase.

Credit card companies make extra money off the customer for facilitating the foreign transaction.  Visa and MasterCard typically add a 1% fee for foreign purchases, which is in addition to the 2% “currency transaction” fee that banks commonly add to each transaction.  Therefore, credit card purchases cost 3% of the ticket, which is usually best because credit card companies get the best rate because of their currency purchasing power.  Nevertheless, check with your bank to fully understand their policy and to negotiate the terms of their service fees.  Yes, always ask them to lower your fees.  And if you want to shop around then check out Capital One, which was not charging these fees as of September 2007.

“No commission” does not exist.  Strolling down the street in any European city there one can find numerious money exchange kiosks that advertise “no commission” and a favorable rate.  Upon further inspection it can be seen that the posted rate is actually the ’sell rate’ for $US or whatever currency; pay attention to the ‘BUY RATE’.  Also, the better rate applies to $100 bills only.  Moreover, commission is always applied to travelers checks, except at the institutions that issue them.  These kiosks are not the best places to exchange cash because ‘no commission’ really means that commission has already been included in an unfavorable rate.  However, if exchanging a quantity of $100 bills then try negotiating a better rate, but be careful of who is watching.  Banks can also an option but many times they charge commission and thus are comparable to the kiosks.  Hotels and shops sometimes exchange money and even accept foreign cash for purchases, but the rates are normally unfavorable.

ATMs charge a fee, which means get out as much money as you a comfortable carrying around.  The concept is simple:  withdrawal 20 Euros and there is a $5 fee then the cash costs ~25%, but withdrawal 200 Euros with that $5 fee and the cash costs ~2.5%.  Smaller transactions quickly add up:  withdrawal 200 Euros in 5 transactions can cost ~$25, which is the price of a couple of lunches, a few beers or possibly a hostel bed for a night.  With this in mind before leaving you should call your ATM card issuer and find out their rates, possible ways to avoid excess surcharges and what networks your bank works with to get an idea of the ATM / BancoMats that will be available in the countries you are to visit.  For instance, Bank of America charges a $5 fee for machines not in their network but waives the fee for machines in their network.   There are a number of local, regional banks and credit unions that do not charge fees, which for study-abroad students who, for instance, make an average of 2 withdrawals per week for a 12 week program can save $120 ((2 per week * $5) * 12 weeks).

Dynamic currency conversion (DCC) is a cost for the consumer so do the conversion math yourself.  DCC is when a store, restaurant, hotel, etc. ASKS to charge a customer in their native currency when paying by credit card.  This may seem convenient but the rate that they are charging is usually not optimal and is provided by a 3rd party which is making cash off the transaction.  Since that cash is not coming from the merchant or the credit card company it is coming from the consumer (i.e. YOU) so we recommend to always get the bill in the currency of the country that you are in and not the one you are from.   If you are not given the option to pay in the local currency and the bill / check has been tallied in YOUR currency ask for the transaction to be voided and re-rung in the local currency.  Visa and MasterCard comply with DCC only on the condition that the consumer is given the option between currencies.  If the merchant refuses then this is a breech of their contract with Visa / MasterCard so write in the bill:  Was not given option of Currency.  And contest the bill when you arrive home. 

Main points to remember:

• Call your credit card company before starting to travel to fully understand its international transaction fees.  Ask for the supervisor to get a satisfactory explanation if you do not get one from the initial representative.
• Let your credit card company know that you are going to be traveling abroad so that they do not cut off service due erratic patterns in your spending behavior.  Visa, MasterCard and AmEx work great abroad, but know that Discover Card is not accepted many places abroad. 
• Capital One, as of September 2007, does not charge any international fees.
• Call your ATM provider for the aforementioned reasons and if you find the transaction rate to be too high than consider opening an account at a bank that does not charge international fees, which is common with a lot of regional and local banks. 
• As a rule of thumb insist that the bill be tallied in the local currency, including when withdrawaling from ATM’s.
• We find that ATMs are the best and most convenient way to get cash. 
• Travelers’ checks are expensive to convert and often times the corporate office (i.e. AmEx, Thomas Cooke) are hard to locate and have limited hours, so learn the location and the hours either before or immediately upon arrival. 
• Try to budget to the penny when leaving a country for good.  There is nothing worse than leaving a country with $100 worth of local currency and never finding a place to exchange it back.  The exchange place in the airport will give you a terrible rate. 
• Paying by credit card is usually the best option for hotels, rental cars, bigger restaurants bigger shops but do not rely on paying with credit card everywhere, especially nightlife locations.
• There is usually a purchase minimum at nightlife locations so cash is the better option.
• Because customers are charged for each transaction larger ATM withdrawals are more budget forgiving than smaller withdrawals.  As ATMs usually dispense larger bills, be conscious to preserve smaller bills because merchants can sometimes not exchange larger bills.  Remember, most shops in Europe are independent businesses so it is a real mission for Mom and Pop to have change for 50s and 20s all day long.
• Pay credit card bills, as a rule of thumb, in the local currency.  If charged in your home currency demand a void and repay.  Remember the merchant MUST give you the option, it is a condition of their working with Visa or MasterCard.  We think merchants pull this stunt because they get a 1% back from the DCC company which helps them off-set the 3-5% that Visa / MasterCard charge.
• Getting in the habit of buying a WallStreet Journal, International Herald Tribune, Financial Times or looking at CNN.com every few days to keep up with exchange rates.

More research:

• MSN Money Central
• Cheap flights
• Independent Traveler
• Courant.com