The hidden costs of your foreign holiday money - Spend & Save - Money - The Independent

The hidden costs of your foreign holiday money

You needn't waste your cash on exorbitant exchange rates, handling fees and bank charges this summer. Matthew Wall explains

Millions of holidaymakers will be paying over the odds for their holiday cash this summer because they did not do their homework before travelling.

Using credit and debit cards to withdraw cash from foreign ATMs may be quick and convenient but you will pay handsomely for the privilege. Why give money to banks when you could be spending it having fun?

One of the most expensive places to exchange money is at a foreign bank's cash machine. Not only will your card issuer charge a handling fee for using your credit or debit card abroad, some also charge an extra percentage of the amount withdrawn as commission. On top of this you can then get stung by a poor exchange rate offered by the local bank. And you will not always be told the exchange rate you are being offered before making the withdrawal.

According to the financial comparison service Moneyfacts there are very few banks or building societies that don't charge for using debit and credit cards abroad. The big banks levy a cash conversion charge of between 2.75 per cent and 2.99 per cent and then a cash transaction charge of between £1.50 and £5 on top of this. You will get clobbered a similar amount when making a purchase as well. Only Norwich & Peterborough building society offers free current account usage when abroad.

Most card issuers also charge between 2.75 per cent and 2.99 per cent per transaction when you use your credit card abroad, with the Post Office, Nationwide, SAGA, Santander's Zero credit card and Halifax's Clarity credit card being the honourable exceptions.

Bear in mind that if you use your credit, rather than debit, card to withdraw cash from a foreign ATM you will start being charged interest on the amount borrowed straight away, then there is the cash handling fee of around £3 minimum on top.

Make sure you understand the terms and conditions of your particular card as there could be a minimum as well as a maximum charge. In this case making lots of small cash withdrawals will mean the charges mount up alarmingly, so withdraw as much as you need for a few days at a time.

One way of avoiding card charges is to convert your cash before you travel. But foreign currency specialist ChangeGroup says the 17 million British holidaymakers who travel to Spain – Europe's favourite country destination – could be wasting £200m exchanging pounds into euros at higher rates than they need to pay.

Just because a bureau de change advertises no-commission deals does not mean it is the cheapest. It all depends on the exchange rate being offered.

These days there are plenty of free currency converter applications for your smartphone, whether you're on the Apple, Nokia, BlackBerry or Android platforms. So you can easily cross-check the exchange rates before you buy or withdraw your foreign currency.

"People obviously need to shop around for the best foreign currency deals before they travel," says Michelle Slade of Moneyfacts. "Whatever you do, don't leave it to the last minute and change money at the airport – you'll be paying a premium for the convenience. And be aware that commission-free deals can mask unfavourable exchange rates. Sometimes it can actually be better to pay commission but get a better exchange rate."

Moneyfacts research finds that Marks & Spencer and the Post Office often come out best for over-the-counter foreign currency deals, but online foreign currency sellers are also worth a look. Lower overheads mean internet operations can offer better exchange rates. Two good-value online currency companies are ChangeGroup.co.uk and International Currency Exchange (ICE).

Research by ChangeGroup shows that if you ordered £500 worth of euros online you would receive around €549 from them. Doing the same at an airport via a Travelex bureau, say, would buy you only €514 and you would have a card handling fee of £2 to £5 to pay on top. But HSBC takes the biscuit for charging a £5 handling fee plus a 2.75 per cent commission, meaning you'd only receive around €510 from the cash machine if you used your debit or credit card to get cash. That's nearly £35 worse than the online deal.

Using a foreign cash machine is certainly convenient and you don't have the risk of carrying all your holiday money with you when you travel, but it can be very expensive. Another way of avoiding credit/ debit card charges is to use a pre-paid foreign currency cash card and load it up before you travel. For example, Caxton FX, a foreign exchange company, does not charge for international cash machine withdrawals using one of its currency cards and claims to offer better exchange rates than most of the banks.

You can load the card with up to £5,000 (€7,500 or $10,000) worth of foreign currency using your debit card by phone, text, or online at the exchange rate offered by the card issuer at the time. So if you plan far in enough in advance you can take advantage of exchange rate fluctuations and choose the best time to load your card. Once the cash is on the card, that's it. So long as your foreign transaction is in the same currency there are no exchange charges, handling fees or commissions to pay.

There are now several currency card providers, including FairFX, myTravel Cash, Escape Travel, and BreadFX. You can compare their terms and conditions on a comparison site like travelsupermarket.com. But be warned that a few providers do still charge for foreign ATM withdrawals on their currency cards – €1.50 to €7.50 per withdrawal – and most charge for UK withdrawals, whereas purchases at shops and restaurants will be free.

Another advantage of this type of card is that if it's stolen or lost criminals can't take the money because it is chip and PIN protected. The card issuer has a record of how much cash was on the card at the time it went missing and can send out a replacement if necessary, sometimes for free.

Most of the current crop of pre-paid currency cards are MasterCard branded, which does give you access to 28 million outlets around the world. But if you prefer a Visa-branded product you'll have to go for a card like Virgin's Prepaid Travel Money card, although it does charge €1.50 for foreign ATM withdrawals.

Don't use a pre-paid currency card to pay for fuel abroad though, as you may find that the "shadow" charges made on the card by the fuel company tie up the available cash balance, leaving you temporarily unable to withdraw cash when you need it. This does get settled up a few days later but it's best not to think of your pre-paid card as a credit card alternative.

Another way of keeping holiday costs down is to make sure you carry a European Health Insurance Card (EHIC), the replacement for the old E111 form introduced in 2006. EHICs entitle UK citizens to the same state-provided medical treatment as a local resident receives in other European Union or European Economic Area countries, yet according to research by Moneysupermarket.com only 42 per cent of Brits are familiar with it.

Bear in mind that the EHIC will only cover you for essential medical treatment so you will still need travel insurance to cover you for medical costs if you have a serious accident and need to be flown home. EHICs need to be updated every five years so make sure your card is still valid before you travel. You can order free replacements via ehic.org.uk or ring 0845 606 2030.

Wherever you may roam: keeping your mobile phone bill in check

n Data-guzzling internet-enabled smartphones could cost you a small fortune when abroad, warns Carphone Warehouse. Holidaymakers will rack up more than £500m of mobile phone charges, it estimates, with many users simply being unaware of how much data they're using and how much it costs.

New EU regulations may be helping to bring roaming voice and text costs down, but curbs on data costs don't come into force until July next year. More than three-quarters of holidaymakers soaking up the sun and chatting away on Twitter and Facebook have returned home to phone bills up to £100 higher than their usual monthly amount, says the retailer.

Users can keep mobile costs down by accessing the internet via Wi-Fi hotspots rather than the cellular network and switch off "data roaming" on your phone to stop it always accessing the internet. Ask your network provider about holiday roaming packages before you travel, and change your voicemail message to tell people you're away and ask them to text you rather than call if they really need to get in touch.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

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