Many of us can only afford to get away once a year, and that means it's even more important to ensure you get the best price possible when you're changing your hard-earned cash into foreign currency.
So, whether you’re planning to take cash, travellers’ cheques, a credit card or prepaid card, here’s how you can get the best deal for your money.
It's always useful to take a small amount of cash with you when you go on holiday – after all, you might need to pay for a taxi as soon as you arrive or to buy some refreshments. Of course, while cash is the easiest to use, it's also the easiest to be stolen, so make sure you have adequate travel insurance in place to ensure your money will be protected should you lose it.
The amount of foreign currency you get in return for your pounds and pence will depend on the exchange rate being offered by the convertor. The higher the exchange rate is, the more foreign currency you’ll get for your money (broadly speaking).
For example, if the US dollar exchange rate is 1.56, you’ll get $1.56 for your pound. If you convert £100, you’ll get $156, and so on. However, this simple arithmetic doesn’t take fees into account.
Often, foreign exchange companies will take a commission for converting your cash, which you need to factor in when working out if something’s a good deal. If, for example, you see a really competitive exchange rate, it might not be such good value if it comes with high commission charges.
Ideally, you want to find a company with low or no commission fees, but one that also offers a competitive rate. Be aware that some 'commission-free' deals mean that the rate of exchange you get is poor, so you need to take this into account. You should also look out for ‘handling fees’ (normally around £3, but can be higher) and minimum charges, particularly if you’re converting a relatively small sum.
Exchange rates change constantly, so it’s best to monitor them and strike while the iron is hot when you see a competitive rate, otherwise you’ll miss out. Don’t forget to check if your own bank or building society offers preferential rates for its own customers.
Though they’re not used as much as they used to be, travellers’ cheques are still an option for your holiday spending.
The best thing about travellers’ cheques is that they’re secure, which means you can get your money back if they’re lost or stolen. The trade-off, however, is that they’re quite expensive when compared to other holiday money options.
This is because you’ll most likely be charged commission when you buy them here in the UK and then, when you reach your destination, an exchange rate is applied when you convert them into local currency.
There will also be a flat fee for converting your cheques into currency – which is the same whether you are cashing in £10 or £100 worth of cheques. It therefore makes sense to take your cheques in larger amounts, if possible.
Taking the wrong kind of credit card with you on holiday can be expensive, but if you take the right card and use it wisely, a credit card can be a convenient and cost-effective way to pay.
While your everyday credit card might offer an interest-free period on spending, or rewards, it might not be your best option for use abroad because it may impose fees and charges for use overseas.
Loading or foreign exchange fees apply each time you use your card and can be around 2.75% to 2.99% of the amount spent, plus there are charges when you use it to withdraw cash from an ATM.
But there are cards designed specifically for overseas use that either don’t charge these kinds of fees or charge less than an everyday credit card would. These are the kinds of credit card you’ll want to take away with you, and you can compare them on our credit cards channel here. Some of these cards also offer 0% purchase periods which can be handy if you want to spread the cost of your holiday spending over a number of months.
However, as a rule, you should avoid using a credit card to withdraw cash from an ATM on holiday, regardless of what kind of card it is. Even if you don't have to pay a cash withdrawal fee, you are likely to be charged interest from the day you withdraw the cash - so you will still have to pay interest even if you've cleared your balance at the end of the month.
Overall, though, credit cards usually offer competitive exchange rates and they are more secure than cash. If your cash is lost or stolen, your chances of getting it back will depend entirely on the circumstances and the local police, but if you lose a credit card or have it stolen, you simply call the card issuer and have it cancelled, rendering it useless.
It's worth noting too that there are a few debit cards that will allow you to avoid expensive charges while you are overseas.
If you want the security of a credit card, but don’t want the fear of overspending, or incurring lots of fees and charges, a prepaid card may be the answer.
With a prepaid card you’re still able make purchases and withdraw cash from ATMs, but the difference is that you pre-load prepaid cards with cash before you start spending, rather than paying them off after you’ve spent.
Think of it as the difference between a Pay As You Go mobile phone, which needs to be ‘topped up’ before you can use it, and a pay monthly contract, where you pay for what you’ve used in arrears.
Some prepaid cards are designed specifically for overseas use and allow you to load them up with dollars or euros. Often they allow you to side-step expensive foreign exchange fees, and, if you pre-load them when the exchange rate is good, you won’t lose out if the rate falls between loading and spending – although you could of course lose out if the opposite happens.
Prepaid cards aren’t without their drawbacks, though, and there are fees to watch out for. For a start, there might be an application fee when you first apply for the card, and you could also be charged a fee every time you top up the card, which is typically around 3% of the amount you’re loading onto it. You might even be charged if you don't use the card for a number of months. Be aware too that some cards still charge a fee when you carry out a transaction overseas, though often they are cheaper than credit or debit cards.
With potential charges at every turn, a prepaid card might sound like a less attractive option, but they are ideal if you're on a budget and, providing you're aware of what the fees are, you shouldn't get caught out.
What's more, if you lost your prepaid card and someone else got hold of it, they would only be able to spend what was on the card and wouldn't be able to run up any debts for you to pay off.
Beware dynamic currency conversion
If you use a credit card or a prepaid card loaded with Sterling for purchases while abroad, you need to watch out for dynamic currency conversion, which can cost you money.
When making a purchase abroad, the retailer may (or may not) ask you if you want to be billed in Sterling. This can be convenient because you can get a good feel for how much something is costing you and whether it represents good value, but this dynamic currency conversion comes at a price.
When paying via dynamic currency conversion, you’ll often be charged at a higher exchange rate for the privilege. This is a waste of money, so you should always check the bill carefully before signing anything or entering your PIN. The retailer may do this automatically, so always check and ask to billed in local currency.
What’s the best choice?
There’s obviously a degree of personal preference here, but it's generally a good idea to take a credit card or prepaid card with you to use for your major spends, and then bring a small amount of foreign currency with you to pay for small ticket items such as refreshments and public transport, where using a card isn’t really an option.