Banking Tip: Foreign Exchange for Travel Abroad

Whenever you travel abroad, you are bound to require Foreign Exchange for all your spends abroad. There are several merchants / banks waiting to fleece you when you go to them for your Foreign Exchange Transactions. Do note that forex revenue is a major source of revenue for banks and it is just a question of who makes the least money of you as compared to which is the best the deal for you.

When you travel abroad, you will have 3 options for foreign exchange which are listed below. I have clearly listed out the merits and demerits of each option and clearly stated the option which is best (or least worst) for the customers. Please go through this article and pass on the messages to all your friends who frequently travel abroad.

Option 1: Go to a Money Exchanger on the Airport (Worst for Customer)
This is by far the worst option. I was travelling from Mumbai to Hong Kong recently and the Bank Rate for HKD is as follows 1HKD = 6.1 INR. The rate quoted at the airport was 1HKD = 7.8 INR. Please note that this is more than a 20% mark up and is completely unheard off and these guys are completely fleecing you. To make things worse handling charges of Rs.150 are additional to this. The rate offered at airports abroad and at any money exchangers are slightly better (Mumbai airport is by far the worst I have seen) so you may think of using those. However whenever you travel abroad please be aware of the rack rate. In today’s information age you cannot let other people make money off your ignorance.

Option 2: Use your Credit Card Abroad
Using a Credit Card at a Money Exchanger is no different from using the money exchanger themselves; you are acting even more stupid and paying the Credit Card foreign exchange fee in addition to the 20% or so margin. You could not be more stupid.

However you are better off if you directly spend abroad on your Credit Card. The Exchange Rate that gets applied to your transaction is the approved VISA / Master Card exchange rate which is about 1% over the rack rate. In addition to this your Credit Card Company levies a Foreign Exchange Fee ranging between 1% and 5%. While I am aware of SBI Card offering their Platinum Card with a Forex Fee waiver, and Barclaycard charging 3.5%, I have not heard of any credit card issuer charging in excess of 3.5%.

In such a case if you spent HKD 100 the exchange rate applied would be Rs.6.3 (instead of the Rs.7.8 applied by Money exchangers but higher than the Rs.6.1 rack rate). Hence the Transaction amount would be Rs.6300 and I would pay an additional 3% which would be the Foreign Exchange Fee which would be approximately Rs.200 with Service Tax. Hence the effective Exchange Rate will be Rs.6.5. This is a good option and users should start using this option as compared to money exchangers.

Option 3: ATM Withdrawals from Indian Bank Account (Best for Customer)
This is the best option to get foreign exchange. I am sure all of you have Bank Accounts and Debit Cards with Banks in India. I have with Citibank and ICICI Bank and have validated this with both the Banks. The Debit Cards issued by these Banks are International Debit Cards and have a VISA / VISA Electron / Master Card / Maestro Logo displayed on them. These can be used at any ATMs abroad which have these Logos. When you withdraw money through the ATMs, the rate which gets applied is the rack rate and you get a flat fee for International ATM Withdrawal Transaction which is approximately Rs.150 + service Tax. This means that you land up paying a flat fee of Rs.150 and Service Tax for the Foreign exchange transaction. For low transaction amounts of Rs.5000 and below Option 2 makes sense, however for any transaction which is more than Rs.5000 this option makes the most sense.

I have illustrated the same through examples. If I want 1000 HKD to be converted for Travel to Hong Kong, the bank rate being 1HKD = Rs. 6.1

Option 1: I need to pay the Money Exchange Rs.7800 + Handling Charge of Rs.150 = Rs.7950. The effective Exchange Rate becomes Rs.7.95
Option 2: If you use your Credit Card for 1000 HKD, you have a Credit Card transaction at a premium rate of Rs.6.3 which gives a transaction amount of Rs.6300 and in addition to this a Credit Card Fee of 3% which is approx Rs.200 with Service Tax. The effective Exchange Rate becomes Rs.6.5
Option 3: If you Use your Bank Account, you pay Rs.6100 + Rs.150 + Service Tax and the effective Exchange Rate is Rs. 6.3 which is by far the best option.

I sincerely urge all readers to send this articles to all friends and family who travel abroad frequently as we cannot have all these merchants making money of our ignorance. If you feel this article makes sense the next time you save money by following the tips stated above, please donate a part of the sum saved to charity.

For any queries or feedback do write back to Ask.Pranav@Gmail.Com and I will try to write back to you as soon as possible.

Feature Review: Payment Protection Insurance

Most Credit Card Issuing Banks offer an Insurance feature on their Credit Cards which may be Life Insurance, General Insurance or in some cases may be a specialized form of Life Insurance which is called as “Payment Protection Insurance”

What is Payment Protection Insurance also known as Credit Shield Plus Insurance?

This insurance ensures that if you die while holding your Credit Card, then the entire Credit Card outstanding whatever it might be at that time will be paid by your Insurance Company and will not have to be borne by your family / dependants / legal heirs.

In 99% of the cases I do not recommend this product as it is useless and I have observed that most banks (at lease the credit card issuers I have worked for) do not follow up with the family of the deceased card holder and just write off the out-standing. The fact that if you die, the bank will chase your family is untrue, at least to my knowledge. While they are legally empowered to do it, they do not do it as far as I am aware.

In addition to this, it may happen that at the time of your death that you do not have any Credit Card outstanding at all and hence the entire premium that you have paid has got wasted. I would recommend this card only if you are a perpetual revolver and your Credit Card outstanding at any given point of time is more than your monthly take home salary, then you can think of going in for this product.

The premium amount is usually less than 0.1% of your Monthly Outstanding and gets billed in your Credit Card statement every month. If you have an outstanding of Rs.30000 every month you will have to pay a Premium of approx Rs.30 every month. While this may look like a small amount, this is an expense you can avoid and donate this money to “needy children” which would be putting it to better use.

If you do apply for this product, you will open yourself to complaints such as incorrect premium billed, changes in the premium rates, non receipt of policy documents and in most cases your family will not even be aware that you have this insurance policy.

You need to keep it in mind that the bank will keep calling you and keep saying that “after taking this insurance you can live in peace knowing that your family is secure etc.” but that is all crap. Remember from the Rs.30 that you pay every month, the bank will get Rs.10 from the Insurance company and hence you give your Bank Rs.100 per year. If they manage to sell this product to 100,000 customers, they will get Rs.1,00,00,000 which is waster money going to the bank coffers.

This is a totally useless feature of most Credit Cards, so please stay away from it.

If you have any queries or suggestions, you can write to me at Ask.Pranav@Gmail.Com and I will write back to you as soon as possible. Thanks.