What is the best way to pay for things on holiday?

When you’re planning a holiday, major travel and accommodation costs are mostly straightforward and often paid in advance – but working out how much you will spend on purchases and making cash withdrawals while you’re there is a lot trickier.

Holiday spending can obviously vary dramatically – from almost nothing for an all-inclusive package holiday to a few thousand pounds for a big family holiday. You might be able to use a credit card to pay for a fancy meal at a nice restaurant, but what about a bus ticket or snack from a street vendor? They may only accept local currency, and in small denominations. It’s also important to consider that how you pay for things abroad can add up to 10% to your total spend. 

There are various reasons for this, including how you buy currency, what card you use to pay for things, and whether you choose to pay in the local currency or pounds sterling at the point of sale. The choices you make can result in extra charges, bad exchange rates, hefty foreign transaction and cash withdrawal fees, and more.

If you’ve scored a great deal on a flight or a hotel you don’t want to waste money with a bad exchange rate or unnecessary conversion fees when you are paying for it.

What are the costs and how do you pay for them?

You pay for different things in different ways, depending on the amount of the item and the payment methods that the vendor accepts. On holiday, you would likely pay for a local taxi using cash for example, but hiring a car you would use a card. Here are 10 common costs and how you’d pay for them.

There’s no single rule, but you may find higher card acceptance in more developed destinations. For example, across Scandinavia, it is common to use cards only to pay for virtually everything, including small purchases like a bus or train ticket. In many parts of Africa, as another example, card acceptance is uncommon so you will need to have cash for most purchases.

What are the charges and how are they applied?

Cash withdrawal charges apply for both debit and credit cards. If you withdraw cash abroad you’ll normally pay around 3% of the withdrawal amount or a minimum charge of £3. While 3% might not seem like a large amount, if you withdrew £1,000 over the course of a week of travelling, that would be a sizable £30 just in cash withdrawal fees. If you earn loyalty points (such as airmiles) or cashback for purchases on your card you won’t earn these for cash withdrawals.

When you make a foreign credit card purchase, you will usually pay an exchange rate fee or foreign transaction fee of around 3%. Debit cards have a similar charge called a ‘load fee‘, which is also around 3%.

There’s another fee to watch out for too. While it’s common to see cash machines in the UK state ‘we don’t charge you to withdraw cash here’ you won’t be so lucky with many cash machines abroad. The operator of the cash machine, such as a foreign bank may also charge you a fee for using their machines. This fee will be disclosed to you before you agree to complete the transaction and withdraw the money. These fees are usually fixed, regardless of the amount withdrawn and differ from country to country and operator to operator. It can make sense to take out larger amounts in fewer transactions to keep the costs down.

The final charge, unexpected interest charges, only applies to credit cards. Normally when you repay a credit card balance in full each month you don’t pay interest, but if you withdraw cash, you do. In the UK we don’t withdraw cash with a credit card, but on holiday we’re more likely to. Beware: even if you repay the balance in full you’ll still be charged interest daily. Read more about how to use a credit card correctly.

Specialist travel credit cards and debit cards can do away with some or all of these fees.

Should you use cash, a credit card, or debit card abroad?

As a general rule, spending directly on specialist cards overseas is usually cheaper than withdrawing currency and spending the cash. For a more detailed breakdown of the options, read on.

Cash

You’ll need cash on holiday but there are different options and costs for obtaining it.

First things first: never withdraw cash with a credit card. Second, unless you have a specialist debit card that doesn’t charge for withdrawals, don’t use one at an overseas ATM. Third, never buy currency at an airport as you’ll get a poor exchange rate.

If you are exchanging currency from pound sterling into a foreign currency you’ll usually receive a better exchange rate at your destination than doing so before you leave the UK. Avoid these ‘convenient’ multi-currency ATMs at UK airports.

With the right card, you’ll get better value for money and avoid having to buy as much currency in advance. If you don’t have the right card, won’t qualify or don’t want a credit card, look to specialist travel bureaus, supermarkets and the Post Office for consistently good rates.

The best way to get cash is to compare rates online to find the best deal. If you’re at a major airport there’s likely to be a number of currency exchange kiosks in the airport terminal when you arrive – it’s well worth spending a few minutes checking the rates at each kiosk to get the best deal.

Factor in fees and pay by debit card – if you use your credit card, it’ll count as a cash withdrawal and you’ll be charged a fee and interest even if you repay in full immediately. Also check if the currency exchange kiosk charges a separate transaction fee of their own. You might be enticed by a better advertised exchange rate only to walk away with less money in your pocket because of a sneaky transaction fee.

Using cash on holiday helps you stick to a budget, but it’s a security risk and there’s no Section 75 protection for purchases like with a credit card. It’s a good idea to always have a small amount of cash on you for times when you can’t use a card, though for safety avoid carrying large amounts of cash in public.

Debit cards

The biggest advantage with debit cards is that some allow free foreign cash withdrawals. You’re also more likely to be approved for a debit card as it is spending your own money, rather than being extended credit.

Many debit cards charge a load fee of 3% for every transaction and a further charge when you withdraw cash.

Lots of debit cards also charge another fee of £0.50-£1.50 anytime they’re used to make a purchase. So spending £5 in a shop can cost up to £6.65. Don’t use a debit card abroad unless you get a specialist product that guarantees to avoid these fees.

There are a few good options out there. Starling Bank has a new app-based current account that charges no fees at all for foreign transactions and cash withdrawals. This can save you lots of money when travelling both for card purchases and cash withdrawals. Be aware of their monthly ‘free’ cash withdrawal limits.

Metro Bank also offers a fee-free card for spending and withdrawals in Europe (but with hefty fees outside of Europe). Monzo Bank’s debit card has no fees for overseas spending and on your first £200 of foreign cash withdrawals each month. Virgin Money’s Essential Current Account doesn’t charge for foreign card purchases, but does charge for foreign cash withdrawals.

Credit cards

Specialist travel credit cards are the best method of paying for items abroad, but bad for cash withdrawals. They’re still overall among the best cards to use abroad.

Even credit cards that charge no cash withdrawal fees normally still charge interest on the withdrawal until you pay it off. For non-specialist credit cards you pay the non-sterling transaction fee on all transactions overseas, plus a fee and interest on cash withdrawals.

The best travel credit cards for overseas spending waive the 3% non-sterling exchange fee, which makes them the best way to pay overseas – as long as you remember to pay in local currency. Some travel credit cards also offer fee-free foreign cash withdrawals. Be aware that most credit cards that earn rewards like cash back or loyalty points will charge a fee for purchases in foreign currencies. This fee is usually higher than the value of the rewards you would receive for using the card for the purchase.

Prepaid currency cards

With a prepaid currency card you load it with cash and use it like a debit card. They’re safer than carrying cash as you’re protected if you lose the card. Some retailers, for instance car hire firms don’t accept them. Pre-paid currency cards help you keep tight control of your budget.

Dynamic currency conversion: Always pay in local currency

When spending abroad, be aware of dynamic currency conversion (DCC). When making foreign purchases, you will sometimes be given the option of paying in pounds sterling. If you do this, transactions will be converted into pounds, then into local currency, and then back into pounds, racking up double non-sterling fees and currency exchange losses. 

You may be encouraged to accept a conversion rate on the spot to ‘lock in the rate’, but ignore this encouragement.

This can happen even if you explicitly ask to pay in the local currency, so keep hold of the card machine until then end of the transaction to ensure you’ve paid in the local currency.

Avoid paying in sterling because the rate will be set by the retailer’s own bank, which will almost always be more expensive than the exchange rate offered by Visa or MasterCard.

What protection do you get on foreign purchases?

Another reason specialist credit cards are the best option is purchases costing between £100 and £30,000 are protected through Section 75 of the Consumer Credit Act.

Debit cards provide less protection, though you can sometimes use chargeback to get a refund for purchases under £100. This also applies for credit cards.

With cash you have no protection apart from through travel insurance.

Prepaid currency cards can be insured, which protects your funds on the card – but they don’t offer credit card-like purchase protection.

So, how should you pay for things abroad?

A combination of a specialist credit card, plus a prepaid card and/or cash is the best option to minimise fees, get the best exchange rate, be protected and still have cash available for small purchases.

It’s not easy, but try and anticipate how much you might be spending during your holiday. This way you can have as few cash machine withdrawals as possible to avoid all those pesky fees. It will also help with your budgeting on holidays.

If you can’t get accepted for a credit card, then a specialist travel debit card combined with cash or a prepaid card is the next best option.

24 November 2020