There are two risks to ponder when it comes to preparing for a holiday abroad - exchange rates and charges. There’s not much you can do about the first, but a bit of forethought means you can miss the worst of the second.
By planning ahead for travel money, you save in charges, for there is no foreign currency equivalent of those travel web sites which allow you to book a bargain holiday at the last minute. The fact is that the longer you leave it, the greater the likelihood that you will end up buying your currency at a poor rate.
But that’s just the notes and coins. Many of us nowadays spend with ‘plastic’ such as credit or debit cards. But, again, there is a wide range of charging structures, with many card providers – with the exception of Nationwide – charging hefty foreign exchange loading fees of around 2.75 per cent.
And, while security is usually the last thing on your mind when you’re going on a trip, walking around with a wad of notes or a wallet full of credit cards, is not a good idea in some parts of the world.
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Taking a mix of payment methods
So in order to be prepared for all eventualities, taking a mix of local currency (where possible), travellers’ cheques, debit and credit cards is usually advisable. Pre-paid cards, whereby you buy a card that you load up with cash in advance, can be useful if you want to set a budget for your holiday spending.
This can help prevent you bingeing on credit cards, which typically have a spending limit up £5,000 to £10,000, which may be too much of a temptation for some people.
With people travelling to more exotic destinations, it is best to check on the preferred methods of payment before you go. US dollars and US travellers’ cheques may be preferred to sterling or euros in some destinations.
Buying currency before you go
Not all countries accept plastic to the same extent as in the UK and the US, and even some European retail outlets do not have card terminals, so it is a good idea to have some cash in sterling, or the local currency, before you go.
You can buy foreign currency commission free in the high street banks, the Post Office, Marks & Spencer, Travelex and Tesco. ‘Commission free’ doesn’t really mean much as these providers make their profit on the exchange rates they use and the difference between their buy and sell rates.
Some providers will send foreign currency via registered post to your home address, at no charge on the next working day, or you may be able to collect it at a local branch. The terms for home delivery vary, but are typically £5 for orders of less than £500.
Travellers’ cheques
Travellers cheques, as already mentioned, provide a level of security that may still appeal. Providing you have kept a note of the cheque numbers, you can ring for replacement cheques to be send to you if your cheques are lost or stolen.
You do not normally have to pay commission on foreign currency travellers’ cheques whether online or at a branch, whereas sterling travellers’ cheques usually have a 1 per cent commission charge. However, you will usually be charged commission of typically 2-3 per cent on encashment abroad.
If you are going to a eurozone country, clearly you will want euro denominated cheques, and similarly if you are going to the USA they should be in US dollars. If you are travelling elsewhere, check whether US dollar, sterling or euro-denominated cheques are preferred before you go.
But don’t use a credit card to buy travellers’ cheques because the transaction will be treated as if you had made a cash withdrawal and will incur the usual 1.5 per cent cash advance charge and interest will start clocking up from the day of withdrawal.
Last minute alternatives to bureaux de change
If you wait to get foreign currency at a port or airport, the chances are that you’ll be forced to use the bureau de change located there. This is unfortunate because they are notorious for offering poor rates and sometimes high commission as well.
However, there are some euro ATMs – cash machines which dispense euros – that do not charge commission and offer better exchange rates than bureaux de change.
At present, there are a limited number of these at UK ports, airports and nearby locations, operated by NatWest, Travelex and ICE (international currency exchange).
Pre-paid cards
The new kids on the block are pre-paid cards. These are plastic cards which you load up with money before you go. At present you can only get sterling, euro and US dollar values loaded onto these cards, and not all providers off all three choices. But you can use them at cash machines like a debit or credit card to get cash as they are chip and PIN cards.
The advantage pre-paid cards offer over credit or debt cards is that a fraudster can only take out the money loaded on to the card and no more.
The latest in this range is Barclays Travel Money Card, but you can also get these pre-paid cards from Lloyds TSB, and the Post Office. The Barclays card costs nothing to purchase, while the Lloyds TSB card has a £7.50 purchase fee, and the Post Office card costs £10.
Lloyds TSB only allows the card to be loaded in euros or US dollars but the Post Office and Barclays cards also allow sterling. Maximum and minimum amounts apply when it comes to loading up the card. At the Post Office £50 to £5,000, Lloyds TSB £1 to £3,000, Barclays £200 to £2,500.
The typical charge for using these cards to get money from an ATM will be around 2 per cent with a minimum of £1.50 to £2, but remember there is no conversion charge when you use them in eurozone Europe or the USA because the card will be loaded in euros or US dollars.
Using credit cards for purchases
The vast majority of credit cards charge an extra 2.75 per cent for foreign currency transactions, as well as making a turn on the exchange rate, which can lead to some nasty surprises when you receive your credit card statement.
Only the i24 card (i24card.co.uk), Nationwide, the Post Office and Saga credit cards don’t charge this foreign exchange loading. In Saga’s case, the ‘no foreign exchange loading’ only applies within the EU. Outside the EU, a 1 per cent loading applies.
By contrast, the SkyCard Master Card levies a thumping 2.99 per cent for foreign exchange transactions, while the average foreign exchange loading across all credit cards is 2.66 per cent, according to Defaqto, the financial research company.
Using debit cards for cash withdrawals
The cheapest way to withdraw cash from a cash machine while abroad is to use a Nationwide debit card, which does not charge a foreign exchange loading of 2.75 per cent or a minimum transaction fee of £1.50-2.99, like most debit cards.
Above all, NEVER use a credit card to make cash withdrawals as this is one of the most expensive way of accessing cash, whether in the UK or abroad. Credit card providers charge higher rates of interest for cash withdrawals than for purchases and interest starts clocking up from the date of withdrawal, not from the statement date.
Dynamic currency conversion
If all that was not bad enough, there is ‘dynamic currency conversion’ to be aware of. Check any slip or bill before signing, or entering your PIN. Beware of that ‘helpful’ waiter who presents your bill in sterling ‘to make it easier’. This means you have to accept their exchange rate and a service charge to convert the bill back into the local currency which could be as much as 7 per cent! So always insist on paying in the local currency.
Exchange rate spreads
The other loading that few of us take into consideration is the actual rate of exchange we are getting. When buying foreign currency in the UK, ring round to see who is offering the best deal on exchange rates or if you live near the City, you could check out the rates at some of the foreign banks to see if they offer a competitive rate.
Bear in mind that ‘no commission’ does not mean ‘no charge,’ so don’t be lulled fooled by providers claiming ‘commission-free’ currency, as the provider will be making its profit on the exchange rate.
Remember that the acid test is the amount of money you have in your hand at the end of the transaction, so before you commit yourself, ask.
Last edited August 2007
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