Small Change

Why you should pay in local currency overseas

Paying in S$ when using your credit cards abroad will rack up unnecessary extra charges

Anyone who travels at all would have come up against this scenario - you are ready to pay for your purchase with your credit card when you have to choose whether to pay in Singdollars or the local currency.

A quick word of advice: always choose the latter.

I have always vaguely understood that using your credit card to pay in Singdollars while overseas would rack up extra charges but I did not fully know the extent of the damage until recently, thanks to Mr Aaron Wong, who runs the popular blog milelion.com, a Singapore-focused travel hacking site that teaches people to travel better for less.

Mr Wong and I became friends recently when he read a column I wrote about the dilemma I faced between using credit cards to collect air miles versus cashback. He proceeded to give me an education in how to get the most out of my credit cards and chase miles like a pro.

In between his busy schedule of flying around the world on business class, scrutinising and comparing the pros and cons of various credit cards for his blog readers and holding down a full-time job, he reached out to me to talk about Dynamic Currency Conversions (DCC).

In short, DCC is a service offered by payment solution providers such as Global Blue, First Data and Euronet Worldwide, which allows you to pay in Singdollars when using your credit card overseas.

The catch: the currency conversion is done at a rate that is unfavourable to you, the purchaser. The additional revenue generated from this transaction is split between the payment solution provider and the merchant.

There is no standard DCC margin - it varies from merchant to merchant, and from one payment solution provider to the next.

DCC is often marketed to merchants as a way to earn extra income while improving customer satisfaction. According to the payment solution providers, customers benefit from increased transparency. They immediately know how much they will be charged in their home currency, so they get no surprises when they receive their credit card statements.

For business travellers, this is especially useful as they would be able to make claims in their home currency without having to wait for their credit card statements.

Offering DCC also gives customers more choice, as they get to see how much their purchase would cost in both currencies, and decide which to pay in.

But whether these benefits are of real value is another matter altogether.

After all, with Internet banking, a list of your credit card transactions is available online within two or three days, so business travellers who need to make claims do not have to wait that long.

And in a world where you can easily whip out your phone and google currency exchange rates before you head to the cashier, you do not need DCC to tell you how much your purchase should cost in your home currency.

"To add insult to injury, if you opt for DCC, you are hit both by the unfavourable rate plus additional bank charges from your credit card issuer," Mr Wong adds.

That is, opting for DCC does not absolve you from foreign currency transaction charges. Singapore banks levy a fee of 0.8 to 1 per cent of the transaction cost, if the purchase is made in Singdollars but outside of Singapore.

This fee might be lower than the usual 2.5 to 3.5 per cent levied on foreign currency transactions. But when combined with the unfavourable DCC forex rate, it results in you paying more than if you just let the bank do the conversion.

Furthermore - and this is a major deal-breaker for mile chasers - paying with DCC means forgoing any foreign currency spending bonuses you would normally earn with certain credit cards.

But okay, DCC is meant to be optional anyway, so why kick up a fuss?

Well, sometimes, merchants fail to give customers the option.

Mr Wong notes that travel forums are rife with complaints from people who were not given the choice and were charged in their home currencies without being asked.

A frequent traveller himself, he has also been in such situations.

"I did a car rental with Avis in the United States and paid with my Visa card. I was hit by DCC and was not given the option of rejecting it. When I complained I got an e-mail telling me that DCC was charged by default, which is not an allowed practice," he says.

Another time, it was a restaurant at a hotel in Abu Dhabi.

"Sometimes it can be as innocuous as a waiter autopiloting through the menu on the credit card machine while getting your charge slip generated. This happened to me at a hotel in Abu Dhabi where the waitress selected DCC for me without asking. I had to raise a fuss with the manager to get the transaction reversed."

For anyone who wants to avoid DCC as much as possible, The MileLion of course has tips.

First, you could use an American Express card when travelling, as they do not support DCC.

Second, know your rights. Whenever you give your card to a merchant, you could proactively state that you want to be charged in the local currency.

"Some merchants will tell you that their systems 'have to use DCC'. This is dishonest and inaccurate," Mr Wong says.

Indeed, MasterCard and Visa have drawn up guidelines for merchants on DCC usage and both state that merchants must inform customers, either verbally or via a terminal, that they have the right to choose the currency in which the transaction will be completed.

The rules also state that once the cardholder has decided which currency they would like the transaction to take place in, the merchant must honour the cardholder's choice.

(Neither MasterCard nor Visa provides the DCC service.)

If the DCC is forced on you, you can file a complaint with Visa or MasterCard.

Mr Wong says: "If you're using Visa, tell the customer service officer to look for Reason Code 76: incorrect currency or transaction code or domestic transaction processing violation. This is the internal code that Visa uses when merchants refuse cardholders the choice of paying in the local currency."

If you're using MasterCard, tell the customer service officer to look for Reason Code 4846, the code used when the cardholder was not given the option of choosing the currency that the transaction was completed in, or did not agree to the currency of the transaction.

Mr Wong goes so far as to say that you should file a dispute with your bank, even if the transaction amount is small.

I take no issue with that, but I don't foresee having the time or tenacity to dispute and follow up on all DCC transactions made against my will.

But hey, that's why he's The MileLion and I'm not.

A version of this article appeared in the print edition of The Sunday Times on August 13, 2017, with the headline 'Why you should pay in local currency overseas'. Print Edition | Subscribe