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Here's how to keep credit limit in check abroad...

Last updated on: February 15, 2012 08:34 IST

Here's how to keep credit limit in check abroad...

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You love travelling and you are a globe trotter. Technology has made things easier for you. Now you need not carry a lot of foreign currency as your credit card is doing the job of currency exchanger very efficiently.

As much as technology makes life easier it also gives rise to some loop holes which might burn a hole in your pocket at times.

It's wise to keep yourself updated regarding such loopholes to ensure your liability does not in way increase more than it should!

This homework at times is going to provide you some extra leverage for your spending budget on your foreign trip.

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Image: These tips provide some extra leverage for spending budget on foreign trip.
Photographs: Reuters

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One such loop hole of international credit card usage is Dynamic Currency Conversion or Cardholder Preferred Currency service.

Let's try to explore this loophole from the consumer's perspective and try to figure out a strategy which will make your trip even more fulfilling.

Dynamic Currency Conversion, also designated as Cardholder Preferred Currency, is a service provided by merchants (not network service providers like Visa or MasterCard) in some foreign countries where you go on vacation or some business trip.

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Image: One such loop hole of international credit card usage is Dynamic Currency Conversion.
Photographs: Reuters

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If you agree to use the DCC service, the merchant will convert the transaction amount of purchase at the point of sale from the currency in which the price (i.e., foreign local currency) is displayed into another currency (i.e. your domestic currency) using an exchange rate that typically includes a service charge.

The currency exchange rate offered is over and above the wholesale exchange rate being offered by Visa/MasterCard normally.

Example of a DCC transaction: Abhi is in Singapore and decides to purchase a jacket using his SCB international credit card. The price tag on the displayed jacket in the store is SGD 20.

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Image: Currency exchange rate offered is over and above the wholesale exchange rate.
Photographs: Reuters

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After inspecting the jacket he takes it to the payment counter and the cashier at the counter offers him two options to make his payment. He can either make the payment in SGD or make the payment in Indian rupees using the DCC service.

Abhi was not sure about the difference between the two modes of payment and he agreed to the option of payment using DCC. He felt comfortable with the idea that the amount will be displayed in Indian rupees. After getting Abhi's consent the cashier dynamically converts the SGD purchase amount to Indian rupees and gives him the bill.

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Image: Cashier dynamically converts the SGD purchase amount to Indian rupees.
Photographs: Reuters

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While generating the bill cashier informs him about the exchange rate getting applied for conversion and a fee being charged for the service (about 2.5 per cent mark up over a wholesale exchange rate and the 2.5 per cent fee).

Abhi was a bit taken aback when he heard these details.

However he did not say anything as he himself had chosen the DCC option by using a button on an electronic screen and agreed to pay SGD in rupees terms for the jacket using the exchange rate provided by the merchant that included a 2.5 per cent fee for the DCC service.

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Image: Abhi was a bit taken aback when he heard these details.
Photographs: Reuters

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If a customer chooses DCC option for making payments he is approximately overcharged by five to seven per cent. It's a case of nice profit margin for the banks just by making the customer choose DCC option.

Some merchants (particularly restaurants and merchants in parts of Asia and Europe) may even use DCC option without asking you. How can you benefit if you do not use the DCC? If you don't use the DCC option the conversion rate applied is the wholesale currency conversion rate.

So you save about three per cent in the currency conversion and you are also saved from paying the DCC service charge of 2.5 to 3.5 per cent.

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Image: Customer is overcharged for using DCC option.
Photographs: Reuters

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Visa/MasterCard too charges a fee in the range of one to two per cent for currency conversion but these charges are comparatively better to the charges applied for DCC.

If a merchant offers this service, you should almost always decline it, since the rates of conversion used are frequently higher than any fee you are liable to pay for having the billing done in the foreign local currency. Examples of an overcharge up to 6.5 per cent to seven per cent are actually seen in the real world.

As a precautionary practice always check your receipt, and if you see anything involving your home currency in a country that doesn't use your home currency, ask the merchant to recalculate the amount in the foreign local currency.
In some cases, the merchant may claim that their credit card terminal automatically does the conversion, but Visa/MasterCard merchant agreements generally require the merchant to offer transactions in foreign local currency.

It's advisable to abandon the transaction if you are forced to take the DCC route. Visa/MasterCard requires the merchant to disclose the DCC charges and they must provide the customer with a choice of getting the bill in foreign or the domestic currency.

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Image: It's advisable to abandon the transaction if you are forced to take the DCC route.
Photographs: Reuters
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