It can be tempting not to think too hard about your holiday money when you go away. In the UK you tend to carry a bit of cash and then stick the rest of your spending on a credit or debit card - so why should it be any different when you travel?
Unfortunately, it's not that easy. Unless you put a bit of thought into how you spend when you're away, there's a serious risk you will end up making one or more of the seven most expensive credit card mistakes people make on holiday.
1. Using a card with high charges
There are two different sorts of charges that credit card providers will add to your transactions when you're overseas. You need to know about them both, and check what your credit card company will charge you in each case.
The first is what's known as the 'load' on the exchange rate. This is where the card company adds a percentage of the transaction on top of the exchange rate. The second is a transaction charge, which is a separate penalty, payable each time you spend on the card.
The good news is that since the beginning of 2014, the banks have had to come clean about these charges, so if you look at your bank statement after the trip, it will break down exactly what it has cost you in terms of separate charges. However, knowing this after the fact is too late to stop you spending a fortune on these charges, so you need to check before you go.
There are specialist credit cards that don't add a 'load' to the exchange rate - so you pay the lowest exchange rate available. There are several on the market, including Halifax Clarity, Post Office and Santander Zero.
There are a couple with caveats - such as Saga, which is for the over 50s only; the Lloyds Avios card which charges a £24 annual fee so it isn't worth getting just for the overseas transactions; Nationwide, which is only for current account customers; and Aqua Reward which is designed for those with a poor credit history so won't give you a huge credit limit and has a staggering interest rate of 34.91% if you don't repay in time.
The Post Office card has the added feature of 0% interest on purchases for three months, Saga has 0% interest for the first nine months on purchases, the Nationwide card offers 0% for 15 months - plus cash back, and the Lloyds Avios card offers 0% for 16 months.
It's worth bearing in mind that these cards will still charge you from day one on any cash withdrawals - and some charge more than others - so it's worth getting money out separately before you travel, for your cash needs.
3. Agreeing to pay in the local currency
Some banks, shops and restaurants overseas will give you the option of paying in pounds rather than the local currency - this is particularly rife in some Spanish resorts. It seems like a great way of knowing what the transaction will cost you, but it's actually a great way to end up spending more. The business itself will invent the exchange rate they use - and will add a significant sum on for good measure. As long as you have a credit card that's cheap to use overseas, paying by card in the local currency is the cheapest way to go.
4. Using a debit card
Some debit cards have the worst fees of all. These include some of the biggest players - such as Santander (which charges a load of 2.75% and a charge of £1.25 each time you use the card), Lloyds (which costs you a load fee of 2.99% and a fee of £1), TSB (which charges a load of 2.99% and a fee of £1), Bank of Scotland (which charges a load of 2.99% and a penalty of £1), Halifax (which charges a load of 2.75% and a fee of £1.50), and Intelligent Finance (which charges a load of 2.25% and a fee of £1.50).
These charges mean it's essential to check what charges are involved in using your debit card abroad before you travel. If you are paying a small fortune and it's too late to get another card, then you may be better off exchanging your money before you go or using a pre-paid currency card.
There are some exceptions to the rule. So for example the Norwich & Peterborough Building Society doesn't have overseas spending fees or a cash withdrawal fee overseas. Likewise Metro Bank has no foreign exchange loading or cash withdrawal fees in Europe - although it does charge elsewhere in the world. To get hold of these debit cards, you will have to shift your current account, which is arguably a lot of hassle to get around currency charges, but it's a useful bonus if you already have one of these accounts.
5. Using your credit card to get foreign currency
If you use your card to withdraw cash from a bureau de change or a cash machine overseas, your card will charge you a cash withdrawal fee. To make matters even more expensive, your card treats cash withdrawals separately from any other kind of spending, and will charge you interest from the day you withdraw the cash - even if you pay it off in full by the end of the month.
6. Avoiding cards altogether
The costs involved with some cards are enough to put you off altogether. However, deciding simply to steer clear of using your card means you will miss out on the cheapest way to spend. If you get a specialist card, you'll be given an exchange rate that beats any other.
7. Abusing the card when you get home
The temptation is to carry on using your card when you get back - whenever you need some available credit. The trouble is that this is exactly what the specialist cards are relying on. They are nowhere near as competitive in the UK, so if you really need a credit card for the UK, you'll need to get a second card - and leave your overseas card for holidays alone.
These cards also come with the caveat that you will only save money if you pay the balance off in full and on time to avoid paying any interest.
If you cannot trust yourself to get a credit card (or you don't have the credit record for one), then a decent alternative is a pre-paid card from a foreign exchange company. These allow you to load the card with currency in advance in pounds, then the card provider will convert your money using its own exchange rate, and you can use it while you're overseas in the same way you'd use a debit card.
These cards aren't perfect. The exchange rate will not be as good as those available from the best overseas cards. However, many pre-paid cards offer a much better rate than the one you get when exchanging cash.
In addition, you have to take care to avoid cards with lots of fees. These can include an application fee, a 'replacement fee' - which is effectively an annual charge, a monthly fee, a spending fee, a cash withdrawal fee, and an inactivity fee if you haven't used the card in 12 months. There are some fee-free cards, such as Caxton FX and the Travelex Cash Passport (as long as you use it at least once a year or cancel the card within a year), so it's important to shop around for the card that suits you.
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