Is plastic fantastic?

Instead of buying foreign currency before they travel, many people just pack their debit or credit card. In part one of our week-long holiday special, Marianne Curphey counts the cost of paying on plastic

Peak holiday season begins next month and thousands of people will be heading off for their annual summer break. Alongside the sun cream and swimming costume, many holidaymakers will be packing their credit and debit cards.

Around 69% of us will use our card while we are abroad, according to a recent survey by financial information service Moneyfacts. Using your plastic to obtain foreign currency from ATMs is quick and simple, but it can be very expensive, particularly if you withdraw lots of small sums from cash machines abroad. According to Nationwide building society, UK cardholders spent over £20bn on credit and current account debit cards overseas in 2004, and over £500m was paid to card providers in fees.

"Generally cards charge a percentage of the amount that you withdraw, usually equivalent to 2.75%," says Daniel Newbolt, a researcher at Moneyfacts. "On top of this you will have to pay another fee if you are withdrawing cash, which can start to mount up if you make a lot of small cash withdrawals. Only a few card providers, such as Nationwide and Lombard, do not charge at all for foreign use." Other banks defend their fees by saying that they reflect the cost of administering foreign transactions.

Fees overseas
When you use your credit card there are three separate charges to watch out for. First, you will usually pay interest on any cash from the day you withdraw it. This applies even if you have got an interest-free deal on your credit card. The second charge to watch out for is what's known as a "foreign currency loading". Credit and debit card providers charge you for the privilege of withdrawing foreign cash or making purchases overseas. Finally, if you withdraw cash either in the UK or abroad on a credit card you will pay a handling fee - this can be up to 2%.

If you use your card abroad regularly it is worth considering one of the credit cards which doesn't have such hefty charges. The Nationwide Classic card, for example, has a cash withdrawal fee of 1.5% (a minimum of £1.50), which is at the lower end of the scale, and no foreign currency loading fee.

When you are abroad you can also use your Switch or debit card to take out cash, but even if your balance is in the black you will usually have to pay for the privilege. In general, you will be charged both the foreign currency loading and a cash handling fee for withdrawing money. If you are making a purchase, you will have to pay up to 2.75% on the total cost of the goods. However, Nationwide's current account customers are not charged a cash advance fee for withdrawing money from foreign ATMs.

"Holidaymakers are often better off taking travellers cheques or cash out beforehand and using cards for emergencies," says Daniel Newbolt. If you do want to use your card you will find it more cost-effective to withdraw a large amount of money because you will always be charged the minimum fee, even if you only take out very small amounts. For purchases he says there is no difference between spending large or small sums.

A fair exchange
Card providers use the normal banking rate on the day of transaction to make the exchange rate calculation, and if you take out cash, the interest on the withdrawal starts from that day. You can find out what the typical exchange rate is on the day of your purchase by keeping an eye on bureaux de change, but this is not a guarantee that you will get the same deal on your card. APACS, the UK trade association for card issuers, says the exchange rate varies from day to day as world currencies rise and fall.

It's also important to look at the terms and conditions of you card, since some offer extra perks like travel accident insurance and limited free travel insurance, while others do not. Purchase protection is included free with Amex Blue, Abbey Cashback, Alliance & Leicester, Nationwide and Egg cards. Among those card issuers who offer free travel insurance are Marbles, Nationwide, Smile, Egg, Morgan Stanley, Alliance & Leicester and Abbey.

Credit and debit cards are now much more widely accepted than they used to be, but you can still encounter problems in more far-flung destinations or in small shops and restaurants. Mark Bowerman of APACS recommends that you check in advance before assuming you can using your card in small outlets. He also suggests that you phone your card provider before you leave the UK to check how many outlets it has links with in your holiday destination.

If you do have your card refused it could be because your purchase has alerted the bank's intelligent detection software. "Your account will have a normal usage pattern - a typical profile of where and when you spend and the location where you do most of your shopping," says Mr Bowerman. "If you suddenly used your card in the south of France to buy goods of a much higher value than you would normally, then the software will flag this up as abnormal spending. As a result the card issuer will be trying to get in contact with you to ascertain whether you are the genuine card holder." If you face a problem like this, call your card provider to let them know that it is you who is trying to make the purchase and it will allow the payment through.

Tomorrow: buying travel insurance

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