Should you pay in local currency?

Taking plastic with you on holiday is convenient and safer than carrying around a wallet full of cash. However, if you’re not careful, you could get stung by fees and poor exchange rates. Here is everything you need to know to avoid being caught out.

What are the charges for using your cards abroad?

Many (although not all) debit and credit cards charge fees if you use them overseas. Below are some of the fees to watch out for.

Non-sterling transaction fee 

A non-sterling transaction fee is applied to transactions made in a currency that isn’t pound sterling. This fee, also known as a foreign transaction fee, could apply when you pay for something in a shop or restaurant or withdraw cash on your card at an ATM.

Depending on the card provider, you could be charged between 2.75% and 2.99% of the transaction value. So if your card had a fee of 2.99% and you spent £100, an additional £2.99 would be charged to your card.

Cash advance fee

If you use your card to withdraw cash abroad from an ATM (known as a cash advance), you will usually be charged a cash advance fee. This fee is between 2% and 3% and is charged on top of the non-sterling transaction fee.

In other words, if your card charged a 2.99% non-sterling transaction fee and a 3% cash advance fee and you withdrew £100, you could be charged a total of £5.99 (£2.99 + £3).

Interest charges

If you use your credit card for purchases overseas, you’ll usually be charged interest on any balance you don’t repay at the end of the month – just as you would at home. The exception is if your card offers a 0% on purchases deal for several months.

However, if you use your credit card to withdraw cash from an ATM, interest rates can be higher than other transaction types. What’s more, interest will apply from the date of the withdrawal, even if you pay off your balance in full that month. This can quickly become expensive, which is why withdrawing cash on your credit card should be avoided.

Should you pay in the local currency?

It’s always better to pay in the local currency when you’re on holiday. If a retailer offers to convert your card transaction into pound sterling, politely decline and continue with the transaction in the local currency. So if you’re in France, pay in euros, if you’re in the United States, pay in US dollars. 

Choosing to pay in pounds sterling could end up costing you more. That’s because you’re at the mercy of the retailer’s exchange rate, which is likely to be far less favourable than your card provider’s. And that means you’ll be paying more than you should.

This is known as dynamic currency conversion (DCC) and it also applies to withdrawing cash from a foreign ATM. If an ATM offers to complete your transaction in your home currency, be sure to select the local currency instead to save money. 

How to avoid overpaying on holiday spending

There are several ways to get the best deal on travel money and avoid overpaying.

Choose a card that’s free to use abroad

First of all, you should look for a card that won’t charge hefty foreign transaction fees. This can include:

Travel debit cards

If you open a current account with certain providers (often digital-only providers), your linked debit card won’t charge you when you make purchases or withdraw cash abroad. Make sure you shop around to compare your options and check the fees involved.

Travel credit cards

If you’d prefer to take a credit card on holiday, make sure you look for one that won’t charge a non-sterling transaction fee or a cash advance fee. However, remember that if you use your credit card to make cash withdrawals, you’ll usually be charged interest from the date of the transaction. 

Prepaid currency cards

Prepaid currency cards are another option to explore. You could choose a multi-currency card or a sterling card.

• Multi-currency cards let you load different currencies onto a single card before you go on holiday. You can then use your card to spend and withdraw cash when overseas.

• Prepaid sterling cards let you load pounds sterling onto the card. When you make a purchase abroad, it will be converted into the local currency.

Prepaid cards can be useful for budgeting as you won’t be able to spend more than you’ve loaded onto the card - although you can always top up your card while you’re away if you need to. The card provider sets the exchange rate, which is based on the spot rates offered by the company that processes the transaction – Visa or Mastercard. 

Keep in mind that while prepaid cards can be a good option for spending abroad, they often come with fees of their own. Before choosing one, be sure to check for the following:

• Loading fees

• Card delivery fees

• Conversion fees

• Inactivity fees

• Transaction fees (cash withdrawals and purchases)

Find out more in our guide: How do travel prepaid cards work?

Double check you’re paying in the local currency

Even if you’ve got a card that doesn’t charge you for overseas use, always check you’re paying in the local currency. Remember that if a retailer or ATM offers to carry out the conversion for you so you can pay in pounds sterling, you’ll likely end up paying more.  

Watch out for ATM fees

If you’re withdrawing cash, you should check that the ATM provider itself won’t charge you a fee. Unfortunately, this can’t always be avoided, so it’s best not to use the ATM too often.