When you are heading for your place in the sun make sure you have explored the different options for carrying your money with you, writes Iain Yule
Even in this modern, joined-up financial world it’s worth considering exactly how you are going to pay for purchases overseas. Here we consider the main payment methods.
Though they’re not used as much as they used to be, travellers’ cheques are still an option for your spending, especially if you are on a short trip overseas.
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 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 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. Some of these cards also offer 0% purchase periods which can be handy if you want to spread the cost of your spending over a number of months.
However, as a rule, you should avoid using a credit card to withdraw cash from an ATM abroad, 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.
There is also a hidden charge that most credit card users abroad are unlikely to be aware of. But it can cost you a lot of money.
Some retailers – particularly in Spain, Italy, France and the USA – convert the price of goods from their own currency, such as the euro, into pounds sterling. They will often levy a charge for this ‘service’ and use their own currency conversion rate – which is unlikely to be in your favour. This may not be obvious when you sign your tab.
So you should always ask to be billed in the local currency – thereby avoiding the conversion charge and the dodgy exchange rate.
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.
You can find out more about financial transactions in overseas locations in the ‘Destinations’ section World of Expats.
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.
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 a 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.
Iain Yule is the Editorial Director of http://www.worldofexpats.com