Debit cards are fast becoming the worst way to spend abroad. Fee-free benefits on two of the more generous current accounts have now been pulled so if you're planning a trip this year, watch out for charges.
This week Norwich & Peterborough (N&P) Building Society scrapped its Gold Light current account, which offered free overseas spending, while Metro Bank announced it will start charging for debit and credit card transactions outside Europe from 18 March.
When Metro Bank launched in 2010, the first new high-street bank in a century, perks such as fee-free spending abroad were a big attraction. The bank says it will still offer fee-free transactions in Europe, but in the rest of the world, holidaymakers will soon be charged 1.90 per cent for debit and credit card purchases, equivalent to £1.90 on a £100 transaction. Cash withdrawals will also be charged at 1.90 per cent plus a £1 ATM fee so that's a £2.90 levy on a £100 transaction.
The problem for holidaymakers is that unless you change your current account, you're stuck with your debit card, but it is still important to check with your bank what the charges are before you set off, or you risk getting a nasty shock on your return.
Andrew Hagger of MoneyComms.co.uk says: "At least if you understand the overseas charges, you can adapt your spending pattern accordingly. For example, you don't want to be making cash withdrawals or purchases of £10 or £20 if you're going to be hit with charges of £1.50-plus each time."
The vast majority of banks add on a foreign usage fee for purchases and cash withdrawals, usually around 2.75 per cent to 2.99 per cent, plus an ATM withdrawal charge of as much as £5. If you're really unlucky you could be lumbered with a debit card that charges an additional purchase fee on top, regardless of the amount. Banks hitting their customers with this extra fee include Halifax, Lloyds, TSB, RBS and Santander. For example, Lloyds and TSB customers pay a 2.99 per cent loading fee, a 2 per cent cash withdrawal fee and a £1 purchase fee, while Santander debit cardholders pay 2.75 per cent, 1.5 per cent (at least £1.99) and £1.25 respectively.
If you want to avoid these fees, there is limited choice. Metro Bank is still safe to use in Europe, and N&P offers fee-free debit card spending abroad with its N&P Gold Classic. The sticking point here is it costs £5 per month unless you can deposit £500 each month and keep a balance of £5,000.
Another option is the Nationwide FlexPlus account which offers fee-free cash withdrawals, although you still pay 2 per cent for transactions. The account carries a £10 monthly fee in exchange for a range of benefits including worldwide travel insurance for the whole family, international mobile phone insurance and UK breakdown cover as well as exclusive access to various loans, savings and mortgage rates and interest of 3 per cent on balances up to £2,500.
Various Cumberland BS current accounts will not charge you to use your card for transactions abroad but these are only open to residents within its branch-operating area (which includes Cumbria, Dumfriesshire and select parts of north Lancashire and west Northumberland).
Credit cards can be a useful alternative as several do not charge for card purchases and some, such as the Halifax Clarity Card, offer free cash advances as well, although if you do make any cash withdrawals, you will still be charged interest from the moment you take the cash out. For example, Halifax charges 12.95 per cent representative APR (the rate you get could be up to 21.95 per cent) which works out at just over £1 per month for a £100 withdrawal.
Otherwise, you can use a pre-paid currency card from the likes of Fair FX, Caxton FX, WeSwap and Travelex to avoid currency exchange costs and fees.
Elvin Eldic from Travelex says: "Prepaid cards allow travellers to lock in an exchange rate, enabling them to manage their budgets more easily. A pre-paid card is also not connected to a bank account, bringing piece of mind to those concerned about the threat of fraud or theft."
These cards are linked to the MasterCard or Visa network so you can use them as you would a debit or credit card abroad but most don't charge foreign-exchange fees when you're using the currency on that card. It is often cheaper to use a cash machine with a pre-paid card too. You simply top up your card with money from your bank account, fixing at that day's exchange rate, although there is no actual link to your bank account or credit limit so if it is lost or stolen, you only lose what's on the card.
Don't bother with pre-paid cards that carry a monthly fee and watch out for application and replacement fees, top-up fees and "inactivity fees", which penalise you if the card goes unused.
Whatever card you do decide to use, there may also be local costs that come from paying in a different currency – check that you are paying in the local currency before authorising a payment and ask for it to be changed if the value is shown in sterling.
Kevin Mountford, head of banking at Moneysupermarket, says: "Dynamic currency conversion, where the local retailer offers to convert the transaction into sterling at the point of sale, should be avoided as it's likely the exchange rate used will be less favourable than those being charged by the payment networks, Visa, MasterCard and American Express, who set the exchange rate on debit and credit cards."