One of the experiences that a lot of people have when they use their credit or debit cards abroad is that often they get an option to pay in two different currencies. One is the foreign currency being used in the country where the amount is spent and the other is in rupees.
The selection has to be done properly because it could be that the rupee option might work out to be costly for you.
Here is how to tackle this:
Available Options
If you are using a rupee debit or credit card abroad, then while physically using the card, you are often given a choice—to transact either in the local currency of the country where the spend is being made or to pay on rupees.
So, for example, if you are in the U.K., you would get the option of paying in pounds or rupees. Many people get very happy when they see the rupee option as this gives them familiarity in terms of the currency. More important is the fact that they see the exact amount that they will pay instead of seeing a foreign currency amount, which will then be converted by their card-issuing bank with the final amount being known only later.
This can be a source of happiness for a lot of people because they feel that they can lock in the amount that they will pay at the time of making the expense itself, but the matter is not so simple and it requires some working to understand at to which of the choices actually works out cheaper.
Applicable Rate
The rate that the bank will charge for the conversion of the foreign expense in the foreign currency into rupees becomes crucial because your final expense will depend on this figure when the amount is spent in foreign currency. There is a daily rate that is present based on the foreign exchange market value and this is the rate generally selected by the bank for the conversion. It is usually a few paise around the spot closing rate that one usually sees. The bigger the difference the higher the impact for the individual. So they need to know what is the rate that their bank is selecting for their expenses and this will give them an idea of what will the impact on them.
Conversion Mark-Up
The conversion rate is not the end of the matter as there is also the mark-up that the bank will charge when they use their credit cards. This percentage is actually fixed so the individual knows about the rate that they will face. It can be anywhere from 2.5–4%, depending on the credit card that one is using and the type of relationship with the bank.
Often, certain high net-worth customers are given a lower mark-up fee and this can make a lot of difference when it comes to the final expense. The working that needs to be done requires knowing the amount that has been spent in the foreign currency on which the conversion rate for the day has to be applied. After this, the mark-up by the specific percentage has to be added.
One additional factor that needs to be taken into the calculation is that there is likely to be a goods and service tax charge on the mark-up amount, so this will increase the final amount that would have to be paid further. In effect, the final expense is amount spent multiplied by the conversion rate and then adding mark-up plus GST.
Charge Baked In
Comparing the amount that the individual will pay when they transact in the foreign currency with the figure that is offered in rupees at the time of making the expense would give an indication of which is cheaper. What is important is that the rupees figure for the customer has all the expenses and charges baked in and this means that the figure is usually higher by around 5–6% than the conversion value. In that sense, the individual has to compare the final figure in the earlier working with the rupee figure and this would give the actual situation.
Final Decision
The final decision about the choice to be made depends on the extent of the mark-up by the card issuing bank for a specific customer. If the percentage here is not too high, then the conversion will be better and this is usually the case because the rupee amount charged directly ends up being higher. However, the decision has to be made quickly because one has to be ready with the choice when this is presented on the point-of-sale machine. This is why a prior calculation will give a rough idea of the amount that will be incurred and this can then be compared with the option presented to see which is beneficial especially for larger expenses.
The writer is founder of Moneyeduschool.
The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.
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