Wednesday, 16 May 2012

Travelling overseas: Credit Cards vs Travel Cards

As I mentioned in my April 2012 expenditure review post I am going overseas at the end of this year and have been looking into the most efficient way to take funds with me.  When I have travelled previously I have used a combination of cash / travel card / credit card and debit card (I have never used travellers cheques as they never seemed to stack up for me).

At the very minimum I carry around A$500 (~US$500) in the local currency when I travel.  About $350 of this is as a float which I use to spend on various things and $150 is in different currencies (I have US dollars, Euros and Canadian dollars) as an emergency fund (I chose currencies that I figure will be accepted in every place in the world). 

On a month long trip I expect to spend ~$3000 - $5,000 so the question becomes - what way should I carry my excess funds around with me?  There are really 4 options
  • Credit Cards
  • Travel Cards
  • Debit Cards
  • Travellers cheques
I am going to cover the relative pros and cons of each of the above options (excluding travellers cheques which I have never used) below.

Credit Cards
  • Pros
    • Typically the best exchange rate of all the options
    • Interest free period on purchases / reward points build up
    • You already have one and you can keep using the same card when you go home
  • Cons
    • You typically get charged interest on ATM withdrawals from the moment you withdraw the cash (i.e. no interest free period) as these are counted as cash advances
    • You also get charged currency conversion fees with most cards (For Australians you don't with the GE Finance 28 Degrees MasterCard which is a brilliant option)
    • There is a real risk in less developed areas that your card details will be stolen
    • If you haven't warned your bank that you will be using it there is a fair chance that they will stop debits on your card until you contact them (which in an emergency is a real pain)
    • Susceptible to exchange rate movements
Travel Cards
  • Pros
    • You can lock in your exchange rate today and have certainty around your holiday budget
    • You are using your cash which you have pre-loaded onto the card so there is no interest payable
    • If you are travelling to a location where you have loaded the relevant currency (i.e. if you are travelling to Europe and have loaded Euros) then ATM fees are lower than most credit cards / debit cards
  • Cons
    • Often have lots of hidden fees
      • You pay a (typically) 1% fee on all amounts deposited onto the card
      • If you go to a country with a different currency to the one on your card then the fees really start to add up (e.g. I went to Egypt with a USD card and the fees were well above 4% plus the ATM withdrawal fee)
    • The exchange rate is typically not as good as the one you get with credit cards or debit cards
    • When you come back to your home country the money left on your card is 'trapped' and you have to suck up the high fees mentioned above to get your cash off the card.  Also you are then subject to the exchange rate risk you were trying to avoid
Debit Cards
  • Pros
    • You are using your own money from your bank account with the same pin.  There is no set up cost to this option and no interest payable on amounts withdrawn from ATMs
    • You do not have any exchange rate risk when you get back
  • Cons
    • Exchange rate risk for the duration of your trip
    • Typically not as good an exchange rate as credit cards (but is often better than travel cards)
    • Very high ATM costs (when I went to Hong Kong it cost about $8 per withdrawal regardless of how much I took out of the ATM)
My preferred option

Having used all of the above options I have more recently started to use a combination of credit cards and debit cards.  If you find a credit card that has very low fees for overseas transactions (for example for Australians the GE Finance 28 degrees MasterCard has no annual fees, no currency conversion fees and no international transaction fees which makes it perfect for international travel) and combine this with a debit card which you use to withdraw large amounts of cash at a time (e.g. $1,000 every few weeks) then you can keep the fees to a minimum.

Having used the ANZ travel card I found that I did not like the travel cards very much.  Any certainty I had around exchange rate was far outweighed by the exorbitant fees.  Further exchange rates can move in your favour and you lose the benefit of this with a travel card.  I also lost significant value taking money off the card at the end and it expired after 2 years which meant that I could not even keep it for travel that I was planning to do in the future.  Also in some places the travel cards are not common and there is a bit of a hassle getting them to accept it.  Overall it is not worth the effort in my opinion.

Disclaimer: I get absolutely nothing for promoting the 28 Degrees MasterCard.  I just think it is a great product which I found recently and will be signing up for in the next few months.

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