Fees commissions and spreads can be costly when you buy or sell foreign currency

Watching exchange rate charts can be a bit addictive - they are an 'immediate barometer' of market behaviours when news hits that will affect our economy.

However, the rates quoted in these 'live rate' feeds are not the rates you can buy or sell at. When you come to do a deal, there are transaction costs - there are fees and spreads - and it is wise to know about these before you are surprised at transaction time.

There are three fees you need to consider when you exchange currencies. These costs are separate from and additional to the exchange 'rate'. The key thing is to negotiate these costs if you can. A list of insitutions that trade foreign currencies is here »

1. The fee the institution charges you directly to do the transaction.

This is usually a $ amount worked out as a % of the transaction (sometimes referred to as the "commission"). Often there is a minimum $ amount, and sometimes there is a maximum $ amount. If you ask about fees, it is this charge that you will be advised.

It can be quite a lot, depending on the institution.

However, some institutions promote the fact that they charge “zero commission ” – this does not mean ‘no fees’; what it does mean is that they won’t charge you a % based on the size of your transaction, rather they charge a fixed amount – say $3.99, for doing the exchange.

Generally, the “fee” is what the retailer earns from the transaction.

Our travel currency tool works out the cost to you inclusive of these fees, shows the best bank to buy from with rates right up-to-date.

2. The ‘spread’ the institution applies to the rate.

Exchange rates change second-by-second on wholesale markets. This is the rate that analysts (like us) monitor when we watch the currency markets.

But when you come to do a currency transaction, the institution will not sell you the funds at this rate. They will add or deduct a margin (points) to the wholesale rate depending whether you are buying or selling.

At retail, this can also be a lot. When we wrote this, on average, NZ banks had a spread of between 300 to 500 points around the wholesale market indicator rate – and this depended whether you were buying/selling cash, drafts, or doing a telegraphic transfer (T/T). The bigger your transaction, the tighter the spread (or the fewer the points). Big wholesale traders can operate on less than ten points – in fact CFDs can sometimes be done on less than 5 points.

If you deal with a retailer who is also a wholesale dealer, you can often get them to waive the fees. But if you are making a big transaction, it is really the spread you should negotiate hard over. There are very large margins involved.

3. The credit card “foreign currency service fee”

This is a fee, often about 2.25% of the transaction value, that Visa, Mastercard, or American Express charge over and above the spread they take on the conversion back to your NZ$ card account. This fee will be clearly displayed on your credit card statement, but you will notice this cost well after you have incurred the transaction. If you work out your all-up cost of your foreign currency purchase, you will understand why many customers get angry and feel ripped off. Most credit card companies call this a ‘convenience fee.' Maybe it is ‘convenient’ but it can be very costly.

So far, no-one has found a way to negotiate these credit card fx fees. Its take-it-or-leave-it.

Depending on how you intend to use your credit card when you are travelling, you may well be better to take a foreign-currency debit card ("travel card") loaded with the funds you will need, and already converted. That way, you can negotiate fees and spreads before you leave and avoid those annoying transaction charges from Visa/Mastercard/Amex - but if you have funds left over then you may need to convert them back again.