Pay in your home currency? Why you should almost always say no

You're paying for dinner abroad, the waiter hands you the card machine, and the screen asks a simple question: pay in euros, or pay in US dollars? Paying in your own currency sounds safer, since you'll know exactly what gets charged. In most cases it's the more expensive choice, sometimes by a lot. That option has a name, dynamic currency conversion, and it's worth understanding before your next trip.

What dynamic currency conversion is

Dynamic currency conversion (DCC) is a service that lets a foreign card terminal or ATM convert the price into your home currency on the spot, before the charge is sent to your bank. Instead of your card issuer doing the conversion at its own rate, the merchant's payment provider does it, at a rate that provider sets.

That's the catch. When you choose your home currency, you're no longer getting your own bank's exchange rate. You're getting the rate the terminal offers, and it typically includes a markup of several percent above the mid-market rate. Part of that markup is often shared with the merchant, which is why some businesses encourage you to pick it.

Why your own bank is usually cheaper

If you decline DCC and pay in the local currency, your card network (Visa, Mastercard, and so on) converts the charge at its own daily rate, which is close to the mid-market rate. Your bank may then add a foreign transaction fee, commonly somewhere between 0 and 3 percent, depending on the card.

So the comparison is roughly this:

• Pay in local currency: network rate close to mid-market, plus your card's foreign transaction fee (zero on many travel cards).
• Pay in your home currency (DCC): the terminal provider's rate with its own markup built in, and some banks still charge a foreign transaction fee on top because the merchant is abroad.

In most cases, paying in the local currency comes out ahead, and with a no-foreign-fee card it usually isn't close.

How to spot it

DCC shows up in a few common places:

• Card terminals in shops, restaurants, and hotels that ask which currency you want to pay in.
• ATMs abroad that offer to "lock in" or "guarantee" your conversion rate. That wording is almost always DCC.
• Online checkouts on foreign websites that suddenly show prices in your home currency at the payment step.
• Hotel and car rental bills where the final receipt shows your home currency with an exchange rate printed next to it.

A good rule of thumb: whenever you're given a choice between your own currency and the local one, choose the local one.

What if it was chosen for you?

Sometimes a merchant selects your home currency without asking, which isn't supposed to happen, since the card networks' rules require that the cardholder be offered the choice. If you notice your home currency on the receipt, you can ask for the transaction to be voided and rerun in the local currency. If it's already done, keep the receipt: some card issuers will help dispute a DCC charge you didn't agree to.

Checking the damage yourself

Receipts for DCC transactions usually show the exchange rate that was used. To see what it cost you, compare that rate against the current rate in this currency converter. If a receipt shows 1 euro = 1.15 dollars while the mid-market rate was 1.08, you paid about 6.5 percent more than the underlying rate, before any fee from your own bank.

The short version

Dynamic currency conversion trades a bit of convenience, seeing the price in familiar money, for a worse exchange rate. Decline it, pay in the local currency, and let your card handle the conversion. If you travel regularly, a card with no foreign transaction fee removes most of the remaining cost.