Money matters on the road

By Sarah Schlichter

updated 10:30 a.m. ET June 30, 2009

Before you leave for your next trip abroad, take a moment to think dollars and cents — or should we say pounds and pesos? Get the most for your money when traveling internationally by doing a little homework first.

The most important step is to know your options. While traveler's checks were once the most popular way to carry money overseas, today's travelers are much more likely to rely on credit cards and ATM withdrawals, which usually offer better exchange rates and lower fees. But what's the best option for you? Are traveler's check cards worth a look? And is there any way to avoid those pesky currency conversion fees when using your credit card? Read on for answers to these questions and a comprehensive roundup of all your currency conversion options when you're traveling overseas.

Credit cards

Best for: Large purchases such as airline tickets, hotel bills, car rentals and restaurant meals

Pros: The biggest advantage to using credit cards while traveling overseas is that credit card purchases are exchanged at the interbank exchange rate, usually the best rate you can get for currency exchange. While most credit card issuers charge currency conversion fees each time you make a purchase in a foreign currency (generally 1 percent from Visa or MasterCard plus an additional 1 - 2 percent for themselves), these fees are typically lower than those you'd pay to cash traveler's checks or convert U.S. dollars at a change bureau. And, if you have a Capital One card, you won't pay any fees at all — Capital One is the only major U.S. issuer that doesn't charge its own currency conversion fee or pass the one from Visa and MasterCard on to the consumer.

Cons: Many restaurants, stores and even hotels won't take credit cards, so you'll need to have some cash on hand at all times. While you can use credit cards to get cash advances at ATM's, bear in mind that they'll be subject to any finance charges your credit card company imposes — which can add up very quickly. Plus, if you're not home by the time the bills come in and you don't have someone paying them, you'll be hit with hefty finance charges on these advances.

What You Need to Know: The first thing you should do if you are traveling abroad with a credit card, even if you only plan to use it in case of an emergency, is to call the issuer and ask what fees will apply to your purchases, both in local currency and in dollars. We recommend calling before each trip, as these policies may change without notice.

While you're on the phone, you'll also want to let your credit card issuer know when and where you will be traveling — that way the sudden international activity on your account won't trigger your issuer's fraud alert system. As a precaution, we recommend bringing two credit cards on your trip in case one stops working.

Some merchants (particularly in Europe) offer what's known as dynamic currency conversion, which means that they'll charge you in dollars rather than the local currency. Because some card issuers will waive the currency conversion fee if your overseas purchase is made in dollars, dynamic currency conversion could help you save a few coins. However, keep in mind you'll almost always get hit by a conversion fee from the merchant instead — sometimes up to 5 percent — so you may end up losing out on the deal. Be sure you know what fees apply to either option before deciding which currency to use.

A few other caveats to bear in mind: Some hotels and car rental companies may put holds on your credit card for the amount of your total expected bill. This can use up your credit line before you've actually incurred and paid for the charges. All merchants are supposed to inform you if they do put a hold or "deposit" on your card. If they do, make sure you clarify that the hold has been removed when you've paid your bill in full.

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Keep in mind that you may not have as much protection overseas as you do in the States when problems arise over inaccurate charges. Incidents are always being reported of travelers being charged twice for the same item or for items they never purchased, and credit card companies have been unwilling or unable to intercede on their behalf. Always watch merchants imprinting your card and keep your receipts. After you get home, check your credit card statement. If you see charges you didn't make, call your creditor and ask them to dispute the charges.

Debit and ATM cards

Best for: Getting cash in local currency

Pros: You'll get the same great interbank exchange rate when you make cash withdrawals with your debit or ATM card as you do when you make a credit card purchase. With ATM's available in major cities and airports all over the world, this is generally the cheapest and most convenient way to get cash in the local currency.

Cons: Each cash withdrawal you make will usually be subject to currency conversion fees, foreign ATM fees or other charges from your bank. For more information, see ATM's Abroad. Debit cards work pretty much the same as a regular credit card for purchases, but if your card is lost or stolen you may not have the same protection. By law, as long as you report your card missing within two business days, your maximum liability for use of that card will be $50 — the same as for a credit card. However, if you wait any longer, you could be responsible for up to $500 of unauthorized charges.

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What you need to know: If the ATM card from your home bank isn't connected to the worldwide Cirrus or PLUS networks, you may want to look into getting a MasterCard or Visa debit card. While they look and can be used like regular charge cards, they actually debit your checking account the same way your ATM card does.

If you are renting a car, you should be aware that while you can use a debit card to pay for the rental charges, you might not be able to reserve the car with this type of card.

Finally, don't forget to call your bank and make them aware of your travel plans; as with credit cards, sudden international activity using your debit card could cause your account to be frozen.

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