Sterling has gained value on seven out of the top 10 currency destinations since last summer, according to M&S Money, which says holidaymakers are also picking destinations where a stronger pound will stretch their budgets further.
But using your debit and credit cards to pay for currency, flights, and holiday spending can wipe out all the gains you might make from being clever with your holiday buying.
Research from prepaid card specialist Caxton FX claims Britons will have wasted a staggering £160 million in debit or credit charges while holidaying abroad this year. Some 40% of holidaymakers opt to pay for goods in pounds when using their debit or credit card instead of the local currency, exposing themselves to poor exchange rates and extra charges of 4%.
More than one-quarter of the 18 to 24-year-olds surveyed (18% overall) admitted that they wouldn't know which currency to choose when given the option.
James Hickman, managing director of Caxton FX, said: "The number of people getting caught out by dynamic currency conversion (DCC) has actually increased in the past year. An extra 4% charge on every transaction could add up to some serious cash over the course of a holiday and some rather surprising bank statements upon return to the UK."
The research revealed some 15% of holidaymakers take the risk on local exchange rates, and change currency after they reach their destination, while 26% use their debit card overseas.
Hickman said: "Using your debit card abroad could expose you to a charge from your bank on every transaction, on top of a less-than-favourable exchange rate. Additionally, using ATMs at the destination airport or changing money at your resort are some of the worst options for consumers. Usually, the exchange rate will be very poor and each withdrawal can cost upwards of £1.50."
He added: "Using a prepaid currency card will help ensure you get a good rate and allow you to budget more efficiently. However, if you do find you need to use your debit card abroad, make sure you're withdrawing large sums to avoid the flat fees per withdrawal."
The research also found 15% of adults are not confident enough in their maths skills to calculate how much they are spending in a foreign currency when abroad – with 10% of men admitting as much, compared to 20% of women.
The Post Office says sterling's surge against the euro has led to a 90% rise in the amount of money loaded onto the Post Office Travel Money Card, suggesting people are using prepaid cards to store cash well in advance of their trips. Money can be loaded onto the card online or at a branch, and it can be used as a debit card for up to three years.
Tom Johnson, head of currency provider ICE Direct, says: "The beauty of the prepaid currency card is that you can lock in the rate at the time of loading and this will apply to all transactions. You can also top it up easily while away."
Using a credit card to buy your foreign currency, or to withdraw cash overseas, is an expensive option. There is no interest-free credit period, so interest starts to accrue from the date of the transaction. Interest will typically be 23% to 28%, compared with 16% to 19% for purchases. Foreign cash machine withdrawals will normally incur a withdrawal fee of £3.
The Marks & Spencer credit card, however, does not treat the purchase of travellers cheques or foreign currency from its own stores as a cash transaction.
A handful of cards – from the Co-operative Bank (Fixed Rate), Halifax (Clarity) and Capital One (OneRate) do have low rates for cash advances as well as purchases, but these cards' other features need to be considered too.
Paying for goods and services with your credit card on holiday is different. You will have the usual credit-free period and will be covered if there is something wrong with your purchase that the supplier won't put right, providing it costs between £100 and £30,000. Credit cards do tend to offer a competitive exchange rate – but they will make their profit on the foreign usage charge of up to 3%.
Cards that do not charge fees for foreign usage include Halifax Clarity, the Post Office and Saga (for the over-50s). Nationwide also offers a fee-free card, but only for current account holders who pay in at least £750 a month – and then they throw in European travel insurance too.
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