Defaqto

Taking a mix of payment methods

To be prepared for all eventualities, take a mix of sterling, local currency (if possible), travellers’ cheques, debit and credit cards. However, if you want to set a budget for your holiday spending, pre-paid cards, whereby you buy a card that you load up with cash in advance, can be useful.

This can help prevent you bingeing on credit cards, which typically have a spending limit up £5,000 to £10,000, which may be too much of a temptation for some people.

And as we all travel to  more exotic destinations, it is best to check on the preferred methods of payment before you go. US dollars and US travellers’ cheques may be preferred to sterling or euro ones in some countries.

Buying currency before you go

Not all countries accept plastic to the same extent as in the UK and the US, and some European shops do not have card terminals, so take some some cash in sterling, or the local currency, before you go.

You can buy foreign currency commission free in the high street banks, the Post Office, Marks & Spencer, Travelex and Tesco. ‘Commission free’ doesn’t really mean much as these providers make their profit on the exchange rates they use and the difference between their buy and sell rates.

Some providers will send foreign currency via registered post to your home address at no charge on the next working day, or you may be able to collect it at a local branch. The terms for home delivery vary, but expect to pay £5 for orders of less than £500.

Travellers’ cheques

Travellers cheques provide a level of security that may still appeal in some parts of the world. Providing you have kept a note of the cheque numbers, you can ring for replacement cheques if your cheques are lost or stolen.

You do not normally have to pay commission on foreign currency travellers’ cheques whether online or at a branch, whereas sterling travellers’ cheques usually have a 1 per cent commission charge. However, you will usually be charged commission of typically 2-3 per cent on encashment abroad.

If you are going to a eurozone country, clearly you will want euro denominated cheques, and similarly if you are going to the USA they should be in US dollars. If you are travelling elsewhere, check whether US dollar, sterling or euro-denominated cheques are preferred before you go.

But never use a credit card to buy travellers’ cheques because the transaction will be treated as if you had made a cash withdrawal and you will incur a 1.5 per cent cash advance charge and interest will start clocking up from the day of purchase.

Last minute alternatives to bureaux de change

If you leave your foreign currency purchase to the last minute, the chances are that you’ll be forced to use the bureaux de change located at the airport or train station. This is unfortunate because they are notorious for offering poor rates and sometimes high commission as well.

However, there are some euro ATMs  (cash machines which dispense euros) that don’t charge commission and offer better exchange rates than bureaux de change.

At present, there are a limited number of these at UK ports, airports and nearby locations, operated by NatWest, Travelex and ICE (international currency exchange).

Pre-paid cards

The new kid on the block is the pre-paid card. These are plastic cards which you load up with money before you go. At present you can only get sterling, euro and US dollar values loaded onto these cards, and not all providers offer all three choices.

But you can use them at cash machines like a debit or credit card to withdraw cash, as they are chip and PIN cards.

The advantage pre-paid cards offer over credit or debt cards is that a fraudster can only take as much money as is loaded onto the card and no more.

The latest in this range is Barclays Travel Money Card, but you can also get these pre-paid cards from Lloyds TSB, and the Post Office. The Barclays card costs nothing, the Lloyds TSB card £7.50, and the Post Office card £10.

Lloyds TSB only allows the card to be loaded in euros or US dollars, but the Post Office and Barclays cards also allow sterling. Maximum and minimum amounts apply when it comes to loading up the card. For the Post Office card it is £50-£5,000, Lloyds TSB £1-£3,000 and Barclays £200-£2,500.

The typical charge for using these cards to withdraw cash from an ATM is around 2 per cent with a minimum charge of £1.50 to £2, but remember there is no conversion charge when you use them in the eurozone or the USA because the card will be pre-loaded in euros or US dollars.

Debit cards for cash withdrawals

The cheapest way to withdraw cash from a cash machine while abroad is to use a Nationwide Flex Account debit card, which doesn't incur a foreign exchange loading or a minimum transaction fee of £1.50-2.99, like most debit cards.

Above all, never use a credit card to make cash withdrawals as this is one of the most expensive ways of accessing cash, whether in the UK or abroad. Credit card providers charge higher rates of interest for cash withdrawals than for purchases and the interest payable starts clocking up from the date of withdrawal, not from the statement date.

Dynamic currency conversion

If all that was not bad enough, there is also ‘dynamic currency conversion’ to watch out for. Check the credit card slip before signing, or entering your PIN to make sure that you are being charged in the local currency and not sterling. 

If the retailer has already converted your purchase into sterling, it will have done so at its own (highly unfavourable) exchange rate, but you won't know what this is until you receive your statement..

This could cost you as much as 7 per cent  Even if you were to use a Nationwide Gold credit card which normally carries no foreign exchange loading, dynamic currency conversion will override this. So always insist on paying in the local currency.

If you are stung by this particularly nasty practice, be sure to report it to your credit card provider which can take action against the retailer for doing this.

Exchange rate spreads

The other loading that few of us take into consideration is the actual rate of exchange we receive. When buying foreign currency in the UK, ring round to see who is offering the best deal on exchange rates or if you live near the City, you could check out the rates at some of the foreign banks to see if they offer a more competitive rate.

Bear in mind that ‘no commission’ does not mean ‘no charge,’ as all providers will make their turn on the exchange rate. Ask exactly how much you will get in the foreign currency for your sterling, net of any charges.