Travel Tip: Exchanging Money Abroad

The US Dollar is worth a lot less than it used to be in most foreign countries. Here are some common mistakes many travelers make:

Buying travelers cheques
Travelers cheques do have one big advantage -- if you lose them, they can be fairly easily replaced. But you can often get gouged when changing them to local currency. If you want to bring travelers cheques, get them issued here in the US in the local currency if you can get it commission free (usually available to American Express cardholders). You can then change them at any local bank with your passport for no charge.

Changing your dollars in the airport or at your hotel
You should actually never do this. Ever. You should only do this at the airport if you need a little bit of cash for transportation.

Instead, here are some better options to stretch your dollars.

Use a credit card with a low foreign exchange fee.
There's been an antitrust settlement against the credit card companies for cheating consumers on these fees, which charge you for using your credit card abroad. If you travel abroad or buy in foreign currencies frequently, consider getting a card with a very low fee (some are as low as 0%). Take a look at this compiled list of frequently updated information on foreign exchange fees for credit cards.

For cash, always withdraw from an ATM machine.
ATM machines will withdraw from your bank account without a ridiculous commission. Airports almost always have reputable bank ATM's for you to make your withdrawal. Be sure to check if your bank has a international ATM fee -- many brick-and-mortar banks have them, while many internet banks are fee-free. Here is some more info on what banks are charging.

Be sure to notify your credit card issuer if you are going to be visiting lots of different places, since they might start declining charges out of fear you've had your card stolen.

Taking little steps like these could save you hundreds of dollars that you didn't even know you were spending. Use that money to enjoy your travels, rather than giving it away to bank commissions.

Choosing a Bank: 'Brick and Mortar' or Virtual?

I recently gave a check to a friend for several hundred dollars. While most would expect to hear a "thank you," his response was, "What the hell is Umbrellabank?"

I explained to him that it was a virtual bank which solely operated online. He asked a lot of questions, including:
"How do you know they are real?"
"Where do they keep the money?"
"Aren't you afraid about keeping your money on a website?"

All of these questions are actually the wrong questions, since they seem to indicate a general misunderstanding about how banking works. There isn't a big vault where you can swim in gold coins like Scrooge McDuck could do. Virtual banks are all FDIC-insured, so there isn't a worry about losing all of your money if the bank shuts down.

Though virtual banking offers a lot of advantages, it is definitely not for everyone. Here are some factors you should consider when deciding between a checking account at a virtual bank or at a traditional brick and mortar bank.

Do you deposit a lot of checks or cash?
While most people usually have direct deposit for their paycheck, those who need to deposit cash and checks often may want to keep a brick and mortar bank account. Virtual banks usually process deposits via mail and ATM. A lost envelope or an ATM error could lead to a major delay in accessing your funds.

If you live paycheck to paycheck and you don't have direct deposit, there will be a small delay between your deposit by mail and the processing of that deposit, which will not allow you to have access to your funds immediately.

Do you plan to move in the short term?
For people who move often, sticking with a virtual bank can save a lot of hassle. No matter where you live, you'll have the same access to your bank.

Do you frequently use ATMs?
Those who travel or use ATMs often will probably benefit from virtual banks who generally automatically reimburse you for any fees you incur.

Do you like to yell at bank tellers?
Some people like the peace of mind of being able to talk to someone in person when they are having problems with their bank account. Brick-and-mortar banks are good for these people. (Though, virtual banks don't have the same reputation of randomly asessing exhorbitant fees, leading to fewer confrontations)

Do you need to keep a low minimum balance?
Many virtual banks have no or low minimum balances but still offer competitive interest rates. If you have plenty of cash but don't think the interest rate is worth it, stick with your brick and mortar.

Do you like to pay bills online?
Most virtual banks offer free bill-paying services, where they will electronically or physically send a check to anyone you choose. Brick and mortar banks often charge for this service.

For young people who are more mobile and tech-savvy, virtual banking is usually a better fit. For the past six years, my bank has provided me with free checks, bill paying, ATM reimbursements, no foreign exchange fees, no minimum balance, free transfers to money market accounts, and very competitive interest rates. I'm honestly not sure how to rate the customer service, because I haven't really had any difficulties.

Brick and mortar banks have a lot of overhead, so they tend to pass on those costs to customers in the form of fees and inconvenience. But for some people, sticking with a traditional bank might make sense. However, there is no evidence that traditional banks are any more safe from identity theft or fraud than virtual banking.

If you're thinking of switching to a virtual bank, browse Bankrate.com's checking and savings account current rates. In addition to Umbrellabank, there are many unfamiliar names in this market, like NetBank and iGObanking, but also some of the more recognized companies, like Citibank and HSBC. Be sure the terms fit your needs, and make the switch.

The real benefit to virtual banking is connecting your checking account to a high-yield money market or savings account, which will be discussed in a future post.
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Choosing a Bank: ATM Fees

Americans pay billions of dollars in ATM fees every year. When you use an ATM that belongs to a different bank other than your own, the law permits your bank to charge you a fee AND the ATM owner to charge you as well.

In 2006, the average surcharge assessed by ATM owners climbed again. Add in your bank's surcharge and $20 withdrawal to get some cash for a cab ride might cost you up to 20% extra in fees ($2 from your bank and $2 from the ATM owner).

This practice made enough people angry that some cities and states tried to ban ATM fees altogether. (I actually disagree with banning ATM fees, since they have given incentives for banks to create more and more ATMs all over the world, giving us easy, 24-hour access to our money.)

But then again, I don't pay ATM fees. Ever.

ATM fees are just one of many considerations when choosing a bank, but for many people, it is their primary consideration. For some reason, our instinct is to choose a bank near our home or work, so we can withdraw money without paying fees. While this is fine for some people, wouldn't it be better if every ATM was your bank's ATM?

Since I started college, I skipped opening an account with Bank of America (check out Bank of America's outrageous "ATM Denial Fee") and the other local banks around campus. Instead, I went with UmbrellaBank, an internet bank. Their policy on ATM fees: customers never pay them. Not only does the bank not charge any ATM fees, but they automatically reimburse you when you incur a fee from the ATM owner.

This is a very common feature of internet banking, and it allows you to never have to think about which ATM to withdraw from, since you never pay a fee to get your money. Even some "brick and mortar" banks with actual branches are offering promotions to reimburse your ATM fees.

Deciding between a "brick and mortar" bank and an internet bank can be tricky. I'll discuss the considerations in making this decision in a future post. But if you have a bank that charges ATM fees, get rid of them.

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