Foreign currency and exchange rates explained

Key takeaways

• An exchange rate determines how much money you’ll get when you transfer one currency to another

• Exchange rates change all the time and the higher the rate, the more money you’ll get back to spend when you’re abroad

• Lots of things impact exchange rates including global unrest and interest rates

What is an exchange rate?

An exchange rate sets the price of money when you change it from one currency to another. The figure of the exchange rate will set how much money you get back when you change your money.

For example, if you are changing pounds into euros and £1 is worth €1.10, you will get €1.10 for every pound you exchange.

Exchange rates change all the time based on lots of different factors including a country's economic health and policy changes by its central bank.

What impacts exchange rates?

Exchange rates can be as unpredictable and they are influenced by the following:

• Foreign exchange markets

• Predictions by currency traders

• National interest rates

• Rising or falling inflation

• The country's debt levels

• International conflict

When is the best time to exchange money?

If your currency is valued highly, you can purchase a holiday for less as well as minimise any spending while you’re overseas. This is because your money is worth more than the currency of your travel destination, so you essentially buy more with less, benefiting from the best currency exchange rates. To get the best deals, compare exchange rates with the MoneySuperMarket comparison tool – the earlier you purchase your travel money, the less likely you’ll be stuck with an uncompetitive deal.

What charges can you expect?

When buying travel money, keep an eye out for:

• Commission charges which are often added on by providers

• Dynamic conversion charges when opting to pay in sterling overseas

• Cash advance fees for credit card currency purchases

• Daily interest charges for credit card users

• Transaction fees on credit card purchases

• ATM withdrawal charges with certain cards

• Delivery charges for online orders

What’s the best way to spend abroad?

There are lots of options when it comes to travel money, and having a combination of payment types is usually the best bet. Here are the main options:

Credit cards

Using credit cards is a safe and convenient way of making purchases while abroad. You’ll be able to spend on the card, up to a limit, but unless you clear the balance monthly, you will usually end up paying interest on anything you owe. Some specialist travel credit cards won’t add fees when you use them abroad and you also have the consumer protection of Section 75 for making big purchases.

Prepaid cards

Prepaid cards are loaded in advanceso they can be a handy way to budget when you’re abroad. They function similarly to credit cards but without the risk of getting into debt. The exchange rate is usually locked in when you load the card and it’s easy to top them up as you go. If the card is lost or stolen, you’ll also be able to freeze it from the provider’s app or website.

Compare travel money

You can compare travel money online with MoneySuperMarket by answering a few questions about your finances and preferences.

We’ll then show you the best rates for euros, dollars, or any other currency you might need.