How to get the best exchange rate

If you need to get some foreign currency, or are planning on making an international payment, you’ll need to know the exchange rate that will be used for the transaction.

An exchange rate expresses the value of one currency against another - but because foreign currency is traded on global financial markets, the prices of currencies change all the time. This can make it tricky to get to grips with what exchange rate is fair.

If you’re wondering how to go about getting the best possible exchange rate for your currency conversion, don’t worry. We’ve got you covered.

Here’s all you need to know, to avoid being ripped off with a bad exchange rate, and make sure you keep more of your hard earned cash yourself.

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Now, back to what you came here to read.

What is an Exchange rate

An exchange rate is the value of one currency compared to another.

It sounds very simple, but in reality feels a little more complex because exchange rates between currencies change all the time. That means your dollars may buy more euros or pounds one day, but fewer the next, thanks to fluctuations in the exchange rate.

What is the difference between the exchange rate, mid-market rate and money rate?

When you’re learning about foreign currency exchange, you’ll hear a lot of different terms being used. These may include things like the mid-market rate, money rate, spot rate, forex rate, buy/sell rate and tourist rate for example.

All of these terms are talking about an exchange rate - the amount you’ll have to pay in dollars to buy another currency.

The one you should be most interested in is the mid-market rate, which is also sometimes called the interbank rate. This is important because it’s the only real exchange rate, and the one banks use when they trade currencies on global financial markets.

The mid-market rate changes all the time, depending on a wide range of factors. If a country is considered to be economically successful, and politically stable, for example, the value of its currency might rise. That’s because investors feel confident about holding their money in this currency, and buy more of it. Demand for this currency increases, and so the value goes up.

However, the opposite can also hold true. So if a country is facing a turbulent time in terms of their economy or political situation, investors may become nervous. They sell more of their holdings of this currency, increasing supply. Because there is more supply than there is demand, the value falls.

Although it is often fairly easy to spot the factors at play when exchange rates rise or fall, it can be very hard to predict them in advance. That’s why it’s crucial to keep up with what the exchange rate is doing, to make sure you’re getting a fair deal on your currency exchange.

What rate will I get when using a foreign exchange provider?

Before you commit to using a foreign exchange service it is really important to understand the exchange rate they will use for your transaction. That’s because many banks and currency exchange services don’t offer the real exchange rate for retail customers changing smaller amounts of money. Instead, they add a markup to the real mid-market rate, and keep the difference as their profit.

A markup added to the exchange rate is really just another fee. However, unlike upfront charges, a markup isn’t transparent, and it often means that you pay more than you need to for your currency exchange. If a bank or foreign exchange service says they offer zero commission or fee free foreign exchange, then this is a warning to check the exchange rate offered. Chances are, the cost of the exchange is simply hidden in a poor exchange rate.

Another complicating factor is that many exchange services use different rates for different currency products. So ordering your currency online for home delivery might net you a better exchange rate than simply walking into the exchange office for an on the spot currency conversion, for example. It’s also common to find different exchange rates used for loading travel money cards, compared to changing cash.

To avoid being ripped off with a poor exchange rate, make sure you are clear on the rate being used by your bank or exchange service, before you pay.

How to get the best exchange rate

The exchange rates commonly used by banks and foreign exchange services can be confusing. However, it is possible to get the best available exchange rate if you know where to look.

Firstly you’ll need to know the mid-market rate for your currency pairing. You can get this easily with a Google search, or by looking on a reputable website like Xe.com. You can also use an online currency converter, or even sign up for alerts to tell you when the exchange rates change.

Compare the real, mid-market rate with the exchange rate you’ve been offered by your bank or exchange service, to see if it is fair.

Often the easiest way to find the best deal out there is to compare the final amount of money you’ll receive, after any fees and costs have been deducted. So if you want to change $1,000 to euros, ask a number of different providers how much you’ll receive in euros at the end of the transaction. This approach means you’ll be able to spot if hidden fees or a bad exchange rate will mean you end up with less in your pocket at the end than you ought to.

Exchange rates can be confusing as they change all the time with the markets - and exchange services and banks offer a wide range of different rates depending on their business model. Don’t fall for a business which says it offers fee free currency exchange - in many cases this simply means that their profit has been hidden in a poor exchange rate. That’s not transparent as you can’t easily see what you’re paying for your foreign currency - and it’s often more expensive too.

Getting clued up about exchange rates can help you find the best rate out there for your foreign currency exchange - leaving you with more to spend when you travel.

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