Any savings which might be made from buying the currency at a better exchange rate could be lost if a credit card is used to pay for the transaction.
Other charges can also increase the cost of using credit cards overseas.
The main problem with paying for foreign currency with a credit card is that it is treated as a cash advance by the card providers. It means travellers face a double disadvantage. Firstly, there is no interest-free credit period when you withdraw cash so interest starts to accrue from the date of the transaction. By comparison, when you buy goods and services you can receive up to 60 days free credit if you pay off your next bill in full.
A higher rate of interest will also apply. The interest rate for cash advances is typically between 23% and 28% compared to 16% to 19% when the card is used to pay for purchases.
Using your credit card to withdraw currency at a foreign cash machine should also be avoided as you will normally have to pay a minimum cash withdrawal fee of £3.
Most credit card providers consider the purchase of travellers cheques and foreign currency to be cash transactions as well as purchases of postal orders, and any gambling transactions. One exception is the Marks & Spencer credit card which does not count the purchase of travellers cheques or foreign currency from its own stores as a cash transaction.
To avoid these problems it is better to pay for currency with a debit card. However, anyone who does want to use a credit card for cash type transactions is recommended to opt for a card which charges a low interest rate across the board.
The Co-operative Bank, for example, offers a low fixed-rate credit card which charges 9.9% APR on all transaction types, including cash advances.
However, if an occasion arises when you do need to use a credit card for cash, it is wise to pay off the transaction as soon as possible.
Paying for goods and services with your 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 also give a competitive exchange rate, so don't be tempted if an overseas supplier asks if you want to pay in pounds as theirs will normally be a worse exchange rate – it could add 4% to costs, according to pre-paid card specialist Caxton FX.
However, the downside of using cards abroad is that your card provider will usually charge a foreign usage fee, which can add nearly 3% to the cost, so a £100 purchase will cost you £103.
Fortunately, there are a few credit cards which do not charge a foreign usage fee so if you are a regular traveller it is worth applying for one of these.
They include Halifax Clarity which also has a competitive 12.9% APR on both purchases and cash. Other no-fee cards are offered by the Post Office and Saga (for the over-50s), while Nationwide offers one to current account holders who pay in at least £750 a month.
If you plan to use your credit card while away, let your provider know. Otherwise it may think your foreign purchases are being made by fraudsters and stop the card. So remember to take the emergency phone numbers with you.
