What Is Dynamic Currency Conversion And Why You Should Avoid It

Jane Wardle

Written by Jane Wardle on March 20, 2019

Updated June 3, 2019

Woman paying lunch with credit card at restaurant

According to the most recent figures released by the government, over six million UK residents travel overseas each month. Whether travelling for business or pleasure, this figure represents a lot of money spent in other countries.

In some cases, this money will be spent in cash which has been changed through into the local currency before people travel. In others, it will be spent on credit or debit cards (including those that are pre-paid). In fact, card transactions are becoming increasingly popular for business travellers and tourists alike, who find it more convenient but also believe it’s safer than travelling with a lot of cash.

Many people using cards will probably have been asked if they want to pay in the local currency or in pounds sterling. This is known as dynamic currency conversion and, in theory, offers the customer flexibility and the ability to manage their travel money better. And, while both of these are true, it’s also the case that choosing dynamic currency conversion can be an expensive option, meaning it’s also one that should be avoided.

Dynamic currency conversion might be offered in shops, bars, restaurants and banks. It won’t always be clear that this is what is happening. You might be asked, for example, if you want to have your account charged in pounds sterling or if you want to continue with the conversion. If you aren’t sure what you’re agreeing to, ask for an explanation before going any further. If you don’t, you could find yourself being charged more than you expected.

How Does Dynamic Currency Conversion Work?

When you purchase something in another country or withdraw cash from an ATM using a credit or debit card in the local currency, this transaction is sent through to your card provider who converts the charge into pounds sterling based on the exchange rate at the time the transaction was received.

Because this transaction can take several days to process, you won’t know what the exchange rate will be; depending on the markets, this could work for or against you.

When you purchase something with dynamic currency conversion, the exchange rate is fixed at the time of the transaction, meaning you know just how many pounds and pence you’re spending. However, this exchange rate is set by the business or bank and won’t necessarily correlate with an international exchange rate.
The amount you pay will also include a merchant fee of up to 1% and a dynamic currency conversion fee of up to 4%, which is paid to the terminal provider.

Not only does the rate of exchange vary between businesses, but it also varies between countries, with some such as Croatia, Greece, Portugal and Spain seemingly to charge higher fees across the board.

Why Should You Avoid Dynamic Currency Conversion?

In a nutshell, you should avoid dynamic currency conversion because it will cost you money. The exchange rate you get in this type of transaction is rarely, if ever, as good as the one you’ll get from your card provider, especially when you add in the conversion fee.

Choosing the dynamic currency conversion option doesn’t stop your card provider charging you a conversion fee (which is separate from the dynamic currency conversion fee you are charged); most still will, though it’s worth checking this with them before you travel as it could make choosing dynamic currency conversion somewhat more affordable.

When You Might Want to Use Dynamic Currency Conversion

Given the extra expense involved in using dynamic currency conversion, it’s rare that you would want to use it as opposed to choosing the local currency option. However, if you’re travelling in a position where you aren’t sure how much something is going to cost – and don’t want to be overcharged – you might consider choosing dynamic currency conversion so you can be sure of the price you’re paying.

Another reason might be if you’re on a tight budget and don’t want to overspend; remember, though, that your card provider will still charge you a conversion rate, so you still won’t know exactly how much you’ve spent even if you choose the pounds sterling option.

There is an outside chance that the exchange rate you are offered under dynamic currency conversion is favourable when compared to your card providers rate. It’s worth, therefore, checking at the start of each day the rate your card provider is charging; this rate can change before your transaction is processed, but it will at least give you an idea of whether the dynamic currency conversion rate is better for you.

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