This article is part of our ongoing Business Travel 101 series for newcomers to the world of business travel.
When using your Visa or Mastercard debit or credit card overseas to make purchases or ATM cash withdrawals, you may be asked if you’d like to pay in Australian dollars rather than the local currency – and while it might sound like you’re being done a favour, it’s quite the opposite.
Accept the offer of AUD and you’ll actually wind up paying more for the same purchase; may still be charged an international transaction fee by your credit card issuer; and could even end up earning fewer frequent flyer points on that same spend.
Here’s why you should always say no to “Dynamic Currency Conversion” (DCC) when overseas to avoid being ripped-off in cash and short-changed on credit card points.
1. Dynamic Currency Conversion costs you more
Businesses offer DCC for one reason – to make extra money, turning credit card processing from a cost of doing business into a revenue generating exercise at its customers’ expense, by applying a less-favourable exchange rate than you’d have otherwise paid through your home bank, and booking the difference as profit.
For example, when using a Visa card to pay for a quick lunch in Hong Kong recently, the credit card terminal provided two choices for payment – HKD$85 (selected), or AUD$15.59…
… but a check of Visa’s online exchange rate calculator on the same date showed that HKD$85 would have otherwise been converted to AUD$14.93.
In other words, the AUD exchange rate here was padded by a 4.42% margin in the business’ favour – equivalent to paying a 4.42% credit card surcharge when choosing to pay in AUD, but not when paying in the local currency.
For people who travel abroad regularly, that hidden surcharge can really add up: especially so on larger purchases, such as when settling your hotel bill at the end of your stay.
On a folio worth AUD$1,000, a 4.42% foreign exchange margin would cost you an extra A$44.20 when settling your bill, compared with paying in the hotel’s local currency and letting the bank handle the conversion.
2. DCC doesn’t escape your bank’s international transaction fees
It’s no secret that most credit card issuers in Australia charge an international transaction fee of around 3% when shopping abroad, but what you might not realise is that you’ll generally pay this fee whether your overseas transactions are processed in a foreign currency, or in AUD.
For instance, Australia’s largest credit card issuer, the Commonwealth Bank, charges the same 3% international transaction fee when overseas purchases are made in foreign currencies and also on “transactions in Australian dollars but with an overseas connection”, including “when you make a purchase or obtain a cash advance in Australian dollars while overseas”.
Other major banks in Australia adopt similar policies, so choosing to pay in AUD when abroad won’t negate this bank-levied charge: you’ll actually be stung twice – once at the point-of-sale via the less-favourable exchange rate, and again by your bank when being charged an international transaction fee on the same purchase.
That means paying in Australian dollars overseas could actually be costing you around 7.42% more than the transaction’s true value – 4.42% via Dynamic Currency Conversion, and a further 3% as charged by most banks – so even though paying in the local currency overseas won’t completely eliminate these costs, it’ll still reduce them by more than half.
Not all Australian banks impose international transaction fees on credit and debit card purchases, of course, but the vast majority of Australian cards have this type of fee attached, making it a double-whammy when you pay in AUD overseas.
3. You may earn fewer credit card points when choosing AUD overseas
When it comes to earning frequent flyer points from your credit card, some Australian banks offer a higher number of points per dollar spent on overseas purchases, but depending on your card, this increased earn rate may only apply to spends made in foreign currencies, so choosing AUD could cost you not only money, but also frequent flyer points.
Take the popular Qantas Premier Platinum Mastercard from Qantas Money as an example, which provides an earning rate of 1 Qantas Point per $1 spent in AUD (up to $10,000/month, 0.5/$1 thereafter), but a boosted earning rate of 1.5 Qantas Points per $1 spent in foreign currencies, uncapped.
Spend $1,000 overseas and pay in a foreign currency and you’d pick up 1,500 Qantas Points – but drop $1,000 abroad when paying in Australian dollars instead and that haul drops to 1,000 Qantas Points, or even further to just 500 Qantas Points if you’ve spent more than AUD$10,000 on the card in the same statement period.
Although this card carries a 3% international transaction fee which applies overseas on both foreign currency and AUD payments, choosing to pay in a business’ local currency when visiting another country would still save you paying up to 4.42% more for the privilege of earning up to 66% fewer frequent flyer points in return.
One final tip: always check your credit card statement
Even if you’ve meticulously chosen to pay in the merchant’s local currency every time you’ve used your Visa or Mastercard overseas, dishonest businesses can sometimes override their systems to change your currency choice after you’ve made it, particularly if your transaction was processed by signing a slip rather than entering a PIN.
That’s why you should always check your credit card statement to ensure you’ve been charged correctly – and if there’s a discrepancy, contact your credit card issuer to dispute the transaction.
I’ve had to do this on more than one occasion where overseas businesses have chosen to bill me in AUD, despite selecting their local currency when making the transaction, and have found that you can speed things up when speaking with your bank by passing along the relevant “reason code” for your chargeback request, which gets the process underway quick-smart.
For all Visa cards, you can ask your bank to process a “Visa Reason Code 76 – incorrect currency or transaction code” chargeback when Dynamic Currency Conversion has been applied without your permission. With Mastercard, you can instead request a “Reason Code 4834 – Point-of-Interaction Error – DCC Selected by Merchant or DCC Unknown/Refused” chargeback.
Your bank will then liaise with Mastercard or Visa to resolve the issue, and in some cases, may result in the card networks providing the business with further training to ensure other travellers aren’t charged incorrectly in the future.
American Express and Diners Club don't support Dynamic Currency Conversion, so this isn't a problem you'll encounter when using those cards overseas: only when transacting with Mastercard and Visa at businesses that choose to enable DCC.