Should I use a credit card or multi-currency card for overseas spending?

Although Singaporeans love travelling abroad, they're a lot more hesitant about using their credit cards overseas.

According to a recent JD Power survey, 70 per cent of cardholders wouldn't be willing to use their cards abroad, citing transaction fees, unfavorable exchange rates and potential fraud as the main barriers.

But there's a new development in the market, which may reverse this trend: multi-currency cards. YouTrip started the ball rolling in 2018, and since then, we've seen additional entrants like Revolut and InstaReM, each with its own prepaid card solution (InstaReM's launching in Dec 2019). 

The key appeal behind these multi-currency cards are zero foreign currency transaction fees, currency conversions based on interbank exchange rates, and free overseas ATM withdrawals. 

WHAT ARE FOREIGN CURRENCY TRANSACTION FEES? 

These are fees that banks impose on credit/debit card transactions processed in foreign currencies. In Singapore, these range from 2.5-3.5 per cent, and are applied to the converted amount. 

Multi-currency cards charge no such fee. 

WHAT ARE INTERBANK RATES?  

Let's do a Google search on '1 USD in SGD'. The result you'll see is the so-called 'interbank rate', also known as the 'mid-market exchange rate' or the 'real exchange rate'.

This is the rate at which banks transfer money among themselves. Why this matters is that banks don't usually make these rates available to the end customer - when you transact using a bank-issued credit/debit card, you'll be charged a marked-up rate. 

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Multi-currency cards may charge a markup too, but this is usually smaller than the banks'. The quantum of the markup depends on the currency, the volume and the day of the week you transact (currency markets don't open on weekends, so a spread may be charged to cover the risk of currency movements).

In general, you can expect to pay a 0-2 per cent markup with multi-currency cards. 

SO NO ONE SHOULD USE A CREDIT CARD, RIGHT? 

In one sense, the case for a multi-currency card seems very compelling. There's no fees, and you enjoy competitive exchange rates. If you need cash, you can withdraw a certain amount for free at overseas ATMs. What's there not to like?

The missing piece of the puzzle is rewards. Here's the simple rule: 

When you choose to use a multi-currency card over a credit card, you're trading rewards for savings. 

Whether or not that trade-off makes sense depends on how you value those rewards. Let's assume that we're talking about miles. I've written extensively about how you value a mile, but to cut a long story short, I use a figure of about 1.8 cents each. 

Here's a recap of the credit cards, which offer the most miles on overseas spending. Note how we've derived the cost per mile by taking the foreign currency transaction fee divided by the miles per dollar.

For example, if I spent $1 on the OCBC 90N, my transaction would be subject to a fee of 3 per cent, or 3 cents. I'd also earn 4 miles on that transaction, so my effective cost per mile is 0.75 cents (technically speaking, you'll need to consider the spreads on the exchange rate used by banks, but these are generally small). 

If you value a mile at 1.8 cents, then acquiring them at 0.75 cents is a very good deal. Of course, the valuation of a mile is highly personal - some will have higher valuations, others lower.

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You may come to a different answer depending on your valuation, but for the majority of miles chasers, there's a good case to be made for sticking to your credit card.

YouTrip and Revolut balances can be topped up by credit cards, which begs the question: can you get the best of both worlds by earning credit card points on your top-ups and then spending on your multi-currency card? You could have in the past, but those loopholes have since been closed.

Banks have added these prepaid card services to their exclusion lists, and earning rewards points is now the exception rather than the rule.

CONCLUSION

The case for multi-currency cards all comes down to what your alternatives are. If you're a student who is deciding between using a debit card, changing money at a money changer or using a multi-currency card, it's a no-brainer to me. A multi-currency card will offer you superior rates and more convenience, and you should absolutely use it.

The situation is a bit different once credit cards come into the picture, especially for those that offer outsised rewards on foreign currency spending. By using a multi-currency card, you're giving up the opportunity to earn points and miles. 

If you just care about getting the absolute lowest transaction cost, a multi-currency card works for you. However, those rewards points can be very useful in redeeming your next vacation. Remember, you'll have no opportunity to use your multi-currency card if you can't even fly anywhere! 

Finally, whether you use a multi-currency card or credit card, you still need to be watchful for the dreaded DCC (Dynamic Currency Conversion) scam. Be careful, and always ask to be charged in the local currency and never in SGD.

This article was first published in SingSaver.com.sg.