Money Insider: Pay in the local currency on cards abroad

With peak holiday season just around the corner, the strong pound means your spending money will go a little further if you're venturing overseas for your 2014 summer break.

However the benefit of getting more currency for your pound could easily be wiped out if you are caught out by a simple but legal scam when paying by debit or credit card when abroad.

Whichever form of plastic you use overseas, beware of an increasingly common practice (particularly in Europe) where the foreign retailer or ATM gives you the option to pay in pounds sterling. This is known as Dynamic Currency Conversion (DCC).

Although it sounds appealing to see there and then exactly how much you'll be debited in English pounds, the downside is that it enables the retailer to use an uncompetitive local exchange rate which could see you paying over the odds, in some cases by 3 or 4 per cent

When I was in Spain earlier this year I was asked on more than half a dozen occasions whether I wanted to pay in pounds rather than euros – during ATM transactions, in restaurants and even at the airport duty-free shops.

The golden rule, to help you avoid this unnecessary extra cost, is to always opt to pay in the local currency.

Beware overseas debit card fees

Using your debit card to pay for the weekly shop, to fill up the car or withdraw some cash at the hole in the wall has become second nature for millions of UK consumers.

It's no surprise that it's so popular as it's a secure, convenient and totally free method of payment. The problem is that some people are unaware how much it costs them to use their debit card when abroad.

For a start the majority of banks and building societies charge a non-sterling transaction fee of between 2.75 per cent and 2.99 per cent, so that's almost £3 for every £100 spent. But the charges don't stop there.

If you withdraw cash you'll pay an additional withdrawal fee of around 2 per cent, usually with a minimum charge of about £1.50 to £2.

Furthermore, if you use your debit card in shops, bars and restaurants some banks will also hit you with a fixed fee of between £1 and £1.50 per debit card purchase, no matter how little you spend in a single transaction. The main offenders are Lloyds Bank and TSB, both charging £1, Santander at £1.25 and Halifax, the biggest culprit, stinging you with an extra £1.50 per purchase.

These fees don't sound much in isolation but your charges bill can soon spiral if you make a number of small purchases.

If you want a fee-free debit card for using overseas, take a look at Norwich & Peterborough Building Society or Metro Bank.

It's worth spending a couple of minutes to check with your own bank what its charges are for your particular plastic before you set off, rather than getting a nasty shock when you check your account on your return.

At least if you understand the overseas charges, you can adapt your spending pattern accordingly – for example, you don't want to be making numerous cash withdrawals or purchases of £10 or £20 if you're going to be hit with a charge of £1.50-plus each time.

A prepaid currency card is a cheaper plastic travel companion. Check out the euro or US dollar cards from Caxton FX, Travelex, MyTravel cash and Fair FX and you'll end up with more spending money and less to pay in charges.

Prepaid currency cards can be loaded online from your debit card and the exchange rate is locked in at the time the cash is transferred to the card, so you'll know exactly what you'll be paying for all your holiday transactions.

Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk