Using your credit cards abroad

If you prefer to use your credit or debit cards abroad rather than cash, then you are facing extra expense. Fees charged by UK banks when customers use their cards overseas are on the increase. Another sting is that overseas retailers are encouraging more and more customers to pay for goods, services or meals in sterling – and it’s usually at a very poor exchange rate.

Britons abroad in 2007 will spend something like £25bn on cards, and hidden fees and exchange rates add another £500m. The exchange rate loading added by nearly every credit card provider is between 2.5% and 3% for every foreign currency transaction. Those fees have crept up in the last 12 months or so – another way banks have been trying to buoy their profits after being told they can only charge £12 for every missed payment.

In July Lloyds TSB increase the cost of using its debit cards from 2.75% to 2.99%, and it also charges £1 as an overseas transaction fee every time as well. Lloyds’ profits for the first half of the year were £2bn; they claim that the increase on overseas card charges is to help pay for tighter anti-fraud controls.

NatWest has increased its overseas loading from 2.65% to 2.75%, and its debit card transaction fee has gone up from 75p to £1.25. HBOS has pushed up its international fee on credit cards from 2.75% to 2.95%.

Using a cash machine is also expensive. Banks now generally add a standard exchange rate loading to any cash withdrawal, and most also add a service fee. Withdrawing cash from HBOS costs £1.50 per transaction. With NatWest it’s 2% with a £2 minimum fee. Lloyds TSB has a charge of 1.5% with a minimum fee of £2. A notable exception to these kind of charges in Nationwide which has no exchange loading on its cards and charges no fee for cash machine withdrawals.

The new concern for holidaymakers is the increasing use of ‘dynamic currency conversion’ (DCC) being used by foreign retailers. This is where the shop, hotel or restaurant suggests that they will convert the bill into sterling. The benefit of this is that the UK customer can see what the price is in pounds and pence, but the exchange rates can be as much as 3% greater than those used by credit card providers. Dynamic currency conversion rates are set by the merchant and their bank. Although MasterCard and Visa state that customers must be given a choice of whether to pay in sterling or local currency and the exchange rate must be stated, the rules do not say what language the information must be provided in. The use of DCC is on the increase in popular UK destinations like Ireland, France and Spain.

Alex Bannister, head of banking and credit cards at Nationwide, says: ‘We would like to see the banks and retailers make clear the true cost of using a card abroad. Virtually everyone is charged for accessing money overseas, but when offered the chance to pay in sterling, customers are not sure what to do.’

Another option for paying abroad is to use prepay travel cards. They are the same size and shape as a credit card, with a Visa, MasterCard or Amex logo, but the idea is to load these up with dollars or euros before you go away. There is a mark-up on the exchange rate for loading, but there are no other charges on purchases. These can also be used in a cash machine – for a small fee. Topping up these cards can be done online or by phone. Some have Chip and PIN security and can be frozen if a card is lost or stolen. These cards can also act as a ready-made budget for your trip as you can load the amount you want to spend – but you’ll have to resist re-loading!

Most foreign currency exchange bureaux no longer charge commission, but that does not mean that there is no difference in the amount of foreign currency you can buy with your pounds. It is worth shopping around because there can be big variations in the exchange rates used. This can be as much as £33 on only a £200 money exchange. It is recommended to look beyond your own bank or building society; places like Marks & Spencer, the Post Office and Travel Agents all provide foreign exchanges, but don’t leave it until you’re at the airport – they tend to be the most expensive; you’ll pay for the convenience. You can also buy foreign currency online, but it is essential to compare delivery charges if you do. Also, you should remember that paying for currency with a credit card counts as a cash withdrawal, which means the card company will charge a cash-handling fee and immediate interest.