Don't relax when it comes to your holiday money

Watch for large transaction fees, high commission charges and poor exchange rates, says Chiara Cavaglieri

The schools are soon to break up and the dash to find a last-minute cheap break in the sun is on. With the pound's recent bounce back against the troubled euro you would think that all is hunky-dory for UK holidaymakers this summer.

But with some travel currency providers still paying low rates and others charging bumper fees, it's as important as ever to shop around for foreign cash.

Organising your holiday money can end up costing you dearly in fees, but there are ways to get more bang for your pound. Spending can quickly get out of hand, but if you take the time to compare rates and watch out for any pitfalls, you can start your holiday on the right foot.

Many people take at least some, if not all, of their travel money as cash, leaving the cards for emergencies. The golden rule to taking cash is never to exchange your money at the airport. The convenience of a last-minute exchange of notes doesn't come cheap. With no competition, airport brueaux de change can be expected to offer poor rates while taking high commissions. That doesn't mean the high street is your best bet either; claims of commission-free currency may sound appealing but you can often get better value for money from online providers such as Travelex, ICE (International Currency Exchange), Best Foreign Exchange and Thomas Exchange Global.

"With the continuing weakening pound, it's really crucial holidaymakers take advantage of competitive deals rather than leave it to the last minute. Rates for cash at airports vary but aren't always competitive as it's a captive audience," says Joanna Williams from ICE.

Not only can you compare rates quickly and easily online, but you can also expect better rates because these providers have fewer overheads. Travelex, for example, has an online guarantee that it will offer the best price on foreign currency. You will, however, need to factor in the cost of delivery. Many offer free delivery if you're changing more than £500 but if you order less you may have to fork out upwards of £4. Travelex offers another option by allowing you to order your currency online then pick it from your local bureau de change for free. Similarly, if you do choose to use high street services such as the Post Office they have higher rates for changing over £500 than under. The difference can be as high as 3 percentage points.

When it comes to credit and debit cards, using the wrong one can be a costly mistake. Fees and charges can see your holiday spending rocket if you're not careful. There are four different charges to be aware of; loading fees on the exchange rate of about 2.75 per cent, spending fees on debit cards (for example Halifax adds £1.50 per transaction), cash withdrawal charges and, finally, some providers also charge interest from the day of cash withdrawals.

Both Virgin and NatWest, for example, charge its credit card customers 3 per cent for ATM withdrawals and charge interest on withdrawals at a massive 27.9 per cent.

Picking the right plastic is crucial. For debit cards, Nationwide's Flexaccount Visa is a good bet with no fees attached to it at all for European spending. However, you will need a Nationwide current account to get it and there is a 1 per cent loading fee outside of Europe. For credit card use abroad there are several attractive deals to choose from, including the Santander Zero card which has no loading anywhere and won't charge you for withdrawing cash, although there is still a 27.9 per cent interest rate to pay so it's still wise to avoid withdrawals unless it's an emergency. People over the age of 50 can get a Saga card, which has no loading fee anywhere, and although it charges 2 per cent for ATM withdrawals, there is no interest charged if you repay it in full.

A useful alternative to credit cards are prepaid travel money cards which can be both a cheaper and safer way to take money abroad. These can be used as you would a normal credit card except you have to preload them with cash in another currency. The vast majority of these are free to purchase and don't charge for foreign transactions (steer clear of those that do), but you will still need to compare exchange rates and watch out for loading fees. It's also important to avoid using the card to make a purchase in a different currency to the one it is issued in. "It's a really flexible means of carrying money and you don't need ID to cash funds. Best of all it is very secure as it is not linked to your bank account and can be quickly replaced if lost or stolen," says Sarah Munro, the head of travel money at the Post Office.

Among the best prepaid cards is the Caxton FX which has no transaction fees, no annual fee and no charge for withdrawing cash from an ATM. The FairFX prepaid card is another good option, as it is free to top up by debit card or bank transfer and has no spending or loading fees.

Other foreign currency products worth considering are good old travellers' cheques which are still going strong. Each cheque has a unique ID so if it gets stolen or goes missing, you can quickly get a replacement. As with cash, these will be expensive to buy at the airport and exchange bureaux often charge you to cash them abroad.

"Travellers' cheques were always a good safe bet as they could be replaced if lost or stolen, have security in that only you can cash them and have flexibility in that many places, especially the US, will allow you to use them as cash. However, all of these benefits are usurped by prepaid cards," says Bob Atkinson, a travel expert at comparison site Moneysupermarket.com. "My recommendation is to use TCs only as a final back up – use prepaid cards instead and a well-chosen credit or debit card as your first back-up."

Finally, it's important to be aware of some of the less obvious pitfalls such as dynamic currency conversion (DCC), when you're asked whether you want to pay in the local currency or in sterling when paying for a service or taking out money from an ATM. If you choose to pay in sterling the retailer converts your payment, not the card provider, charging you about 4 per cent for the pleasure. Therefore, it's usually best to opt to pay in the local currency as, although your bank may also charge a foreign currency fee, it's likely to be nearer the slightly less painful 2.75 per cent mark.

Expert View

Bob Atkinson, Moneysupermarket

'Customers need to understand their money when they travel abroad and not just expect that they have a decent deal however they go about getting their currency or spending. Most people are ignorant of commissions and charges and have no idea how much using their cards overseas is costing them as many don't even check their statements when they get back.'

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