Make the most of your holiday money
Holidaymakers heading abroad this year are likely to get a shock when it comes to their spending money, with the value of the pound remaining depressingly weak against other currencies.
Sam Marrs, head of travel money at Sainsbury's Finance, says: "Sadly, the fall in value of the pound means that holidaymakers may need to exchange more money than they did last year."
Luckily, there are ways you can make your holiday money go further. It’s wise to pay for your holiday using a combination of payment methods. Not only does this give you more flexibility, it will also protect you should the worst happen.
Cash is vital – for a start, you’ll probably need some to hand almost as soon as you land, depending on how you plan to get to your hotel or rented accommodation. Having cash in your wallet is also a useful haggling tool – apart from the fact that local shopkeepers and market stalls may only accept cash payments, they might also be prepared to offer you a discount if you’ve got money in your pocket.
However, don’t just wait until the last minute to change your holiday money into the local currency. Bureaux de change at airports and hotels benefit from a lack of competition, and in most cases offer poor exchange rates. It’s well worth planning your currency exchange in advance of you even packing your suitcase.
Equally, you should avoid your local bank; you may be in there anyhow but that doesn’t mean you will get the most for your cash. Instead, buy your currency in the same way you would insurance or a savings account – shop around and compare rates carefully, also taking into account things like commission and delivery charges.
The Post Office and Marks & Spencer tend to offer more competitive exchange rates than high street banks, but you can also go online to buy currency. Internet currency providers tend to offer competitive exchange rates, but remember that you may be charged for delivery so take this cost into consideration.
When changing your money, don’t be swayed by the promise of commission-free exchanges as this doesn’t automatically mean you’ll get more money for your pounds. Bureaux de change that waive commission may claw back some margin with poor exchange rates. In order to be sure you are getting the best deal, you need to compare the total cost in sterling of any foreign currency purchase – if in doubt, ask how many units of currency you’ll receive for your bulk sterling payment.
Taking cash on holiday with you may be convenient but it also poses a danger – if you lose your bag or you are the victim of theft, you’ll have to kiss your money goodbye. In order to protect yourself, buy a travel insurance policy that covers cash losses and check exactly how much money you are able to claim on and under what circumstances.
In addition, research from American Express Global Foreign Exchange Services reveals that British travellers could be losing up to £15 per person, per trip because they are not familiar with local currencies when travelling abroad.
Helen Grace, vice president of American Express Global Foreign Exchange Services, says: “The best way to avoid confusion when travelling abroad is familiarising yourself with the local currency before you leave. It can be really difficult to stick to a budget when you are unsure of the currency rate, and some find it hard to think of foreign currency as real money.”
It may seem irresponsible to put your holiday purchases on credit, but packing your plastic is actually a sensible move. For a start, any purchases between £100 and £3,000 put on credit card are automatically protected under Section 75 of the Consumer Credit Act – meaning you can get your money back should the worst happen.
If you still don’t trust yourself to take your credit card on your trip, at least consider paying for the flights and accommodation in advance on it.
If you do decide to take a credit card with you on holiday, then there are two important points to bear in mind. Firstly, don’t be tempted to withdraw cash using your plastic – this is extremely expensive as most providers charge a higher APR for cash withdrawals plus you are also likely to be hit with a fee of around 2.5% for the pleasure.
Secondly, the vast majority of credit card providers charge for overseas transactions – these normally range between 2.75% and 3% and can add significantly to the cost of your overseas break.
It is possible to avoid these fees altogether by opting for a fee-free credit card – sadly, only the Abbey/Santander Zero credit card and the Post Office waive these fees at the moment. Alternatively, Nationwide’s credit card (which used to be fee-free for overseas transactions) charges just 1%, making it one of the cheapest deals on the market.
Most people rely on debit cards for day-to-day spending, as these allow you to make purchases in shops fee-free and withdraw cash from a hole in the wall without charge. However, using a debit card when overseas isn’t quite as convenient as it is in the UK.
Most providers charge their customers with loading fees and cash withdrawal charges when they use debit cards abroad – these can make purchases and cash withdrawals all the more expensive.
Generally speaking, it is best to avoid making small purchases with a debit card because, alongside loading fees, you may also be charged a one-off transaction fee by your provider.
Check with your bank or building society to find out what charges you will face when spending abroad, making sure you find out whether the fees are set or percentage-based.
However, If you do need to withdraw cash, it is probably preferable to use your debit card rather than your credit card - while you’ll probably incur loading and withdrawal fees, the money will be taken straight from your account so you won’t be hit with any interest.
When paying for goods abroad on card you may be offered the option to make the payment in sterling as opposed to the local currency – this is known as dynamic currency conversion. However, it is hard to know whether you are getting a good deal because the retailer or bank will apply their own exchange fee. Generally speaking your own bank or provider is likely to offer a more competitive exchange rate, so paying in the local currency is normally the cheaper option.
If you do take a credit or debit card on holiday with you, make sure you make a note of the account details and the telephone number for cancellations in an emergency. You should also consider emailing this information to yourself and leaving it with a trusted friend or family member.
Pre-paid cards and travellers' cheques
Research by Caxton FX shows that as much as £6 in every £90 goes to the bank in hidden charges and fees when a credit or debit card is used to withdraw cash from an ATM abroad.
You can avoid these fees by opting for a pre-paid card. Cards such as the FairFX Currency Card or the Post Office Travel Money card can be pre-loaded with cash and used at cash points or in shops that accept Visa or MasterCard.
You can’t go overdrawn on pre-paid cards and you – or anyone else – can top them up online and over the phone. Look out for deals that also provide competitive exchange rates, so you can fix this when you load the card with a foreign currency.
It's fairly easy to get a pre-paid card, as no credit checks are done when you apply. They are ideal if you want to budget when abroad but can also be used in the UK and for shopping online.
However, bear in mind that pre-paid cards aren't necessarily free - there might be a charge for opening an account, putting money onto the card or withdrawing your cash.
Another payment option is travellers’ cheques – while these have become less popular in recent years, they remain a good way to buy currency without having to carry a lot of cash with you. And they are an ideal way to avoid credit and debit cards fees, and to protect your money should you lose your bag or fall victim to theft. Just remember to make a note of the serial numbers so you can replace these should you need to.
Also bear in mind that exchange rates of these cheques aren’t always as competitive as changing currency, plus you’ll need to show ID in order to cash them. Not all retailers accept travellers’ cheques, while other outlets will hit you with commission or handling fees. Larger denomination cheques will, therefore, cost you less to exchange.
It can be expensive to change travellers’ cheques back into cash once you return from your holiday, but as they don’t carry expiry dates you can keep unused ones until your next trip abroad.
Finally, we all know that airlines use the opportunity of their captive market to try and sell you perfume, alcohol and, increasingly, snacks and drinks. Whether you choose to take them up on this offer or not depends on you – but if you’re on your way home, don’t be tempted to use your leftover currency to pay. Airlines often charge a currency exchange fee, meaning paying in sterling is usually cheaper.
The difference between two currencies; specifically how much one currency is worth relative to each other. For example, if £1 is worth $1.50, converting sterling to US dollars, the exchange rate is 1.5. Converting dollars to sterling at those levels, the exchange rate is 0.66, so $1 is worth 66p. There are a wide variety of factors that influence the exchange rate, such as a country’s interest rates, inflation, and the state of politics and the economy in that country.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.