Three ways to avoid the great foreign exchange rip-off

The financial-services industry loves to hide charges in places where mostpeople won't look for them andforeign-exchange (FX) rates are one ofits favourite rip-offs. Make an international transfer, buy a foreign stock, or use a debit or credit card when you're on holiday and you'll usually be hit with a large currency conversion charge.

Even if a firm claims to have no FX fees, or offers commission-free currency, it may be overcharging you: somehow, inflating the exchange rate so that you're paying several per cent over the true exchange rate doesn't seem to count as a commission. The good news is you can cut these charges greatly. You just need to turn to firms that offer a better deal.

How to make cheaper transfers

For international currency transfers, you should forget about using your bank altogether. Specialist FX transfer firms such as HiFXand TorFX have long offered more competitive rates. Recently, these firms have been joined by peer-to-peer (P2P) currency exchange websites, such as Transferwiseand CurrencyFair.

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The difference between these firms is that the FX transfer firms are brokers: they buy currency on your behalf in the wholesale market, adding a commission. The P2P websites match users with opposing trades (so if you want to buy euros with pounds, your money will be swapped with people who want to sell euros) and add a service fee.

In general, the brokers offer a wider range of currencies and scope to negotiate rates if you're transferring larger amounts. The P2P platforms are very cheap and convenient for smaller transfers. So you should shop around to see which is best for your transfer. Either way, you should be able to get the cost down to around 0.5% or less far lower than a bank.

Save on holiday spending

When it comes to spending abroad, you could get a prepaid currency card from a provider such as FairFX, load it with currency and then use this to pay by card or withdraw cash in the usual way. You'll be charged a commission, but this is usually quite a bit lower than a bank's FX rate. But a cheaper and more flexible solution is to get one of the few debit or credit cards that doesn't add a margin to the FX rate.

The Halifax Clarity Mastercard is the best choice for a credit cards: it charges no FX commission and also has no ATM fee for cash (but you will be charged interest on cash withdrawals, so pay these off quickly). Norwich & Peterborough's Gold Classic current account has a debit card with no FX commission or fees worldwide, while Metro Bank's current account is commission-free and fee-free in Europe.

However, it's important to choose to pay in local currency if you're offered the choice between local currency or sterling. Opt for sterling and you'll get a very poor FX rate setby the payment processor (known as dynamic currency conversion, or DCC). Part of the mark-up may be rebated to the merchant, so unscrupulous businesses will often hand you the terminal with sterling preselected.

Don't pay too much for foreign stocks

Currency charges for investing in foreign stocks are even easier to overlook than transfer fees and card fees, because many brokers quote you a price in sterling with a currency mark-up embedded in the cost. If you don't plan to trade in and out of foreign stocks frequently, a broker that does this can still be cost-effective, as long as overall fees are reasonable. AJ Bell Youinvestcan be a good choice: it charges 1% on trades and 0.5% on converting dividends.

For frequent traders, it's best to use a broker that lets you hold foreign currency so that you don't need to convert back to sterling each time. Interactive Brokershas the lowest currency fees in the industry, charging up to 0.002% (with a $2 minimum) although it is geared towards more experienced traders and some users may find customer service too minimal. Some brokers with higher FX fees, such as TD Direct Investing, will let you fund your account in foreign currency, meaning you can use a cheaper external service to do currency conversion.

How safe are currency transfers?

Foreign-exchange transfer firms and P2P websites are a great way to cut costs, but you must be aware that they are not covered by the Financial Services Compensation Scheme (FSCS), unlike banks and stockbrokers. In theory, this shouldn't matter: firms are supposed to keep your money in designated "client money" bank accounts that are separate from the firm's assets and not available to creditors in a bankruptcy. But there are plenty of examples in financial services ofcases where companies failed and not all client money was correctly segregated, due either to fraud or negligence.

So treat segregation as a minimum standard, not a guarantee. Only use fully regulated providers (for UK firms, that means being registered with the Financial Conduct Authority as an authorised payments institution). And consider breaking very large transfers into smaller ones, made over a period of days, to avoid the risk of a firm going bust while holding all your money.