4 mistakes to avoid when buying foreign currency
Written by Robert Bester, Consumer Finance Expert Robert has been a writer for six years, specialising in consumer finance and the UK lending market. Concentrating on consumer credit products, Robert writes informative articles that help customers manage their personal finances efficiently.
17th January 2022
3 minute read
If you’re moving money abroad to finance a property purchase, cover living costs or transfer a pension, you’ll want to make your funds stretch as far as possible.
To help you on your way we’ve highlighted the four big mistakes people make when purchasing foreign currency – and how to avoid them.
1. Using the wrong provider
You might assume your high street bank is the best way to move money abroad, but nothing could be further from the truth. Banks typically offer broad, untailored services, uncompetitive rates and transfer fees.
Leading currency providers such, on the other hand, specialise in international money transfers. They’re able to offer a unique level of support and expert insight, and most provide a range of transfer options.
Opening an account with a leading currency broker should be simple, free and with no obligation to transfer.
And once you’re ready to transfer you’ll have the flexibility to move money on your terms – over the phone with your account manager, online or via a dedicated app.
2. Paying transfer fees
You may think fees are an inevitable bad-guy in the world of finance, and this may be a rule of thumb for banks. But some currency brokers work on a fee-free basis, helping you make immediate savings.
Let’s say you make monthly transfers direct to an overseas account and your bank imposes a £25 fee every time. Over the course of twelve months this accumulates to a £300 unnecessary loss.
Using a provider who doesn’t charge fees puts that £300 back where it belongs - in your pocket!
3. Thinking no news is good news
Exchange rates are temperamental and prone to constant fluctuations. Movement can be triggered by anything from central bank rate cuts to political developments abroad or at home. Currency pairings also react to economic data and some are even susceptible to shifts in seemingly unrelated currencies or environmental factors.
Exchange rate fluctuations can have an enormous impact on the amount you receive when you transfer your money into an overseas currency, so it’s crucial to bear potential movements in mind.
As an example, over the last 12 months the GBP/USD exchange rate has fallen from $1.49 (meaning for every £1 you spend you receive $1.49) to $1.20 – a drop of 29 cents. To put this in perspective, if you purchased a property in the US with a local value of $250,000 at the former rate, the cost in Sterling would be £167,785. The same property at the latter rate would cost £208,333.
Although exact currency movements are very difficult to predict, general forecasts can be made based on the way a currency has behaved in the past, known influencing factors and upcoming news.
Keeping an eye on the latest currency movements might sound time consuming, but it really doesn’t have to be.
A currency broker will monitor the exchange rate on your behalf. They’ll also provide regular forecasts based on their own formidable knowledge of economic trends.
The best currency brokers offer daily, weekly and monthly currency updates, presenting concise and easy to understand insights into market movements.
Other useful services to take advantage of include ‘Rate Alerts’, which alert you by text and email when an exchange rate hits the level you want to achieve.
4. Assuming one size fits all
If you need to make your currency transfer right now, you can use a spot transfer.
With a currency broker this means moving your money ‘on the spot’ at the current exchange rate.
However, if time is on your side you could take advantage of other services and get more for your money.
For example, if you don’t need to make a transfer right now, you could use a forward contract to fix an exchange rate for up to two years in advance.
While you would miss out if the exchange rate strengthened, you would be protected if it suddenly fell.
Let’s consider the previous example.
As before, the GBP/USD fell by 29 cents in the last 12 months. If you’d used a forward contract to fix the exchange rate at $1.49 you would have been a whopping $40,548 better off than if you’d made your transfer at lowest GBP/USD rate.
Another option many people overlook, particularly when using high street banks for currency transfers, is the ability to move money abroad on a regular basis. Perhaps you need to pay overseas employees a monthly wage, or transfer pension payments from a UK account.
By setting up a payment plan with your broker you can ensure those transfers are made automatically on a set date, avoiding the sting of transfer fees and securing the most competitive exchange rate.
Make money transfers and spending abroad easier
Once you’ve made the move abroad, make sure that you have a current account that will allow you to make easy transfers and spend without accumulating fees.
We have plenty of current account options for you to choose from that will allow you to spend for free and easily work between currencies if you plan on travelling back and forth. Start comparing current accounts over on our Current Account page, or read our Challenger Bank review to find an app-based account you can use on the go.
Alternatively, you could also try a travel credit card to get extra protection if you plan on making significant purchases.
Remember, if you want to avoid the 4 common mistakes above, talk through your options with a leading currency provider. Want to find out how much you could save now? Get a quick quote from TorFX today.