Taking your credit card on holiday?

As the holiday season gets under way, there is no better time to review the credit cards in your wallet. Throughout the winter months, the chances are that anyone with more than a handful of credit card debt has been juggling cards and taking advantage of 0% balance transfer and purchase deals. The prospect of overseas travel during the summer brings a new priority - how much you will have to pay in charges for using your credit card abroad?

As a nation we spent more than £30 billion overseas in 2004, according to the Office of National Statistics, and we spend twice as much using plastic abroad as we do in cash. But using a credit card does not come cheap. Banks are estimated to make £500 million in charges from overseas usage of UK credit cards. Most credit card providers charge a fee of 2.75% each time the card is used abroad, which is known as "exchange rate loading" or a "foreign usage fee".

But some charge less and some charge nothing. So, by choosing the right credit card, you can save as much as 5% on your holiday spending, compared with using a more expensive credit card or paying with travellers' cheques.

So, what can you expect to pay if you don't shop around? If you use a card to withdraw cash from a machine, you will usually pay a withdrawal fee, and if you use a credit card to withdraw cash from an ATM you will not only pay the 1.5% cash charge that you would pay in the UK for a cash withdrawal on a credit card, you will also start racking up interest immediately.

To make matters worse, this is usually at a higher rate than the standard rate for purchases. For example, American Express charges 14.9% interest for purchases if you don't pay your balance off in full each month, but 21.9% for cash from the date of the transaction. Its exchange rate loading is a further 2.73%.

Some banks are also introducing new levies for debit card use abroad when paying for goods and services, and not just for ATM withdrawals. NatWest and Royal Bank of Scotland charge 75p, Lloyds TSB charges £1 and Halifax adds a whopping £1.50.

Make savings by spending on the right card

However, because not all card issuers charge the same, you can save money if you choose the right card for your trip. For example, Barclays' customers can avoid ATM withdrawal charges if they can access branches of banks in the global alliance that includes Bank of America in the US, Scotiabank of Canada, Westpac of Australia, Deutsche Bank of Germany and BNP Paribas of France, which between them are represented in 32 countries.

The best deal comes from Nationwide, which has no foreign exchange loading charge on its credit and debit cards and no cash withdrawal fee on its debit card. It charges the higher of £1.50 or 1.5% on its credit card.

Lombard Direct has no exchange rate loading, but it does charge the higher of £2 or 2% for withdrawing cash.

Saga (for the over-50s) and Liverpool Victoria don't apply exchange rate loading in Europe. Saga charges 1% outside Europe, while Liverpool Victoria has just hiked its non-European foreign usage fee to 2.75%.

Watch out for Dynamic Currency Conversion

Using a credit card with no exchange rate loading will be fruitless if you get caught out by a new system of payment that is gaining ground, known as Dynamic Currency Conversion. This is spreading like wildfire, and is particularly prevalent in Ireland, Spain and Italy.

Under the traditional system, you pay your bill with a credit card in local currency, and it is then forwarded through the card processing systems of Visa or Mastercard, converted into sterling on the way and billed to your account in pounds. However, because of the possibility of exchange rate fluctuations, you could end up paying more (or less) than you expected, depending on which way the currency has moved between the time of purchase and the time you receive your bill.

With DCC, the exchange is done on the spot, and you are told at the point of sale how much you will pay in pounds. The snag is that the rate of exchange offered to you is invariably very poor and, although it may be comforting to know how much you have spent immediately in order to help with budgeting, you can end up paying far more than if you paid in local currency and waited to know the final charge when you received your bill back home.

In fact, it will almost certainly be more expensive to pay by DCC if you have a card such as Nationwide's, which would have waived the exchange rate loading had you paid by the traditional method.

The good news is that Visa's and Mastercard's terms and conditions of DCC say that the customer must be allowed to choose the currency in which to pay - either local currency or the home currency. The bad news is that unscrupulous traders, who profit from DCC by taking a handsome "cut" of the exchange rate offered, either lie and say you must pay in your home currency, or even program their card processing equipment to allow you to pay only by DCC - and furthermore encourage you to sign a declaration on the transaction slip that you have been given a choice of currencies when you haven't.

These abuses have been found with multinational hotel and car hire groups, as well as local shops and restaurants. If you don't want to pay by DCC you should refuse to do so and, where practicable, pay cash instead. Report the trader to Visa or Mastercard for breaching terms and conditions if there is no provision to opt out of DCC when you want to do so.

Meanwhile, if you are planning to switch your credit card in time for your holiday, don't delay! Money laundering rules now include tougher identity checks and are leading to longer processing times at an already busy time of year.

21 June 2005 © Moneyextra.com

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