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When you’re planning a holiday, travel and accommodation costs are mostly straightforward – 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. But 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.

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

You pay for different things in different ways. On holiday, you would pay for a local taxi using cash, but hiring a car you would use a card. Here are 10 common costs and how you’d pay for them.

  • Restaurant meal – cash or card
  • Drinks at bar/café – cash or card
  • Car hire – card (required for deposit purposes)
  • Local taxi – cash
  • Bus or train – cash
  • Goods in local shops – cash or card
  • Online transaction – card
  • Theme park – cash or card
  • Extra apartment/hotel charges – cash or card
  • Mobile data and roaming/Wi-Fi charges – your mobile phone bill, or cash/card at hotel

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 2.5% of the withdrawal amount or a minimum charge of £3. If you withdraw £2,000 over two weeks, that’s at least £50 – or more if you make lots of small 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%.

The third 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.

The final charge is for spending on a debit card. For each purchase the bank adds an extra charge of between £0.50 and £1.50 – and this is in addition to any other foreign transaction fees. Check if your debit card charges – and if so, avoid using it, or withdraw one large lump sum and pay in cash.

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.

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. 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.

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.

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.

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.

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. 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.

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 pay in local currency. Some travel credit cards also offer fee-free foreign cash withdrawals.

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.

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.

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.

Now read about how to use your credit card in the right way