It might seem more convenient to settle bills in sterling while you’re abroad. But beware: you could be falling into an expensive trap.
If you’re planning to head overseas for your summer holiday and intend to use your debit and credit card while away, there’s one costly trick to be aware of.
In many popular destinations, retailers are increasingly likely to offer you the chance to pay in pounds rather than the local currency.
On the face of this, it sounds like a good idea: you’ll know exactly how much you’re spending, and won’t have to perform any conversions in your head.
But in fact there is a good chance you’ll be ripped off.
Don't pay in sterling
Why? A little trick known as dynamic currency conversion (DCC) means the retailer gets to determine the exchange rate used in the transaction.
The bad news is that this is usually far less competitive than you would get from your bank or building society if you paid in euros or dollars.
This means you could end up paying far more than you need to.
Experts say that DCC can inflate costs by as much as 5%.
Be on your guard
There is nothing illegal about DCC, but as the rate of exchange is likely to favour the retailer rather than you, the holidaymaker, it’s in their interest to try and force this on to unsuspecting customers.
The problem is that while cardholders should be given the option of choosing the currency they want to pay with at the time of the transaction, in practice, this doesn’t always happen.
In these cases, the first thing you’ll know about it is when you receive your card statement.
So it pays to be on your guard and keep an eye out for DCC at the point of sale: before you input your PIN code, check the amount you are paying is in the local currency.
Don’t get stung by hidden fees
If you plan to use your plastic overseas, you need to watch out for a range of other fees besides DCC.
When a card is used for purchases, there is typically a "foreign exchange loading fee" of up to 3%, and with debit cards some banks levy an extra fee of up to £1.50 per transaction on top of that.
Travellers can also face hidden charges of up to 2% for withdrawing money abroad using a debit card.
There are however certain cards that do not levy overseas charges on purchases.
Credit cards to use abroad
The best-value are generally credit cards.
These include the Halifax Clarity as well as cards from Saga, the Post Office, Nationwide's Select card and Santander's Zero.
Ensure you pay off the balance in full, though, when your next statement arrives to avoid interest charges.
Debit cards can end up being more expensive, so check the fees for purchases overseas before you depart.
Opt for a prepaid card
Another way of avoiding getting stung by credit and debit card charges is by taking a prepaid card loaded with foreign currency.
These cards, offered by the likes of FairFX, CaxtonFX and Travelex, can be bought and managed online or from high street locations, and offer the same rates of exchange as buying currency.
They are available in a range of currencies, and as there is no credit or overdraft facility, it’s easier to budget.
Further, if you lose your card, you have the security of knowing it can be replaced, and that your money is not lost.
Inform your bank
Finally, before setting off on your holiday, remember to tell your bank and credit card company that you’re going away.
Otherwise they could think the overseas transactions are fraudulent and put a stop on your cards.
Also make sure you have all the necessary contact phone numbers in case you need to cancel any of your cards if they are lost or stolen.
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