Be Careful With Your Credit Card Overseas

Thousands of Brits on holiday could be caught out by an increasingly popular exchange rate practice called 'dynamic currency conversion'. Here's how.

A few months ago I was in Florence paying for my friend's birthday present with my credit card, when to my surprise I was asked if I wanted to pay in Euros or Pounds.

Bemused, I stood there staring at the two numbers for a second. And after calling upon the advanced algebraic skills I had learnt in college, I decided to make a strategic decision.

I ticked the box with the lower number.

Dynamic Deception

OK. It's hardly rocket science. But although I made what seemed like a logical choice at the time, in hindsight was it the right one financially?

The process is called dynamic currency conversion (DCC). It is an optional service provided by individual retailers or ATMs when you use your credit or debit card abroad, giving you the opportunity to pay in either the local currency or in pounds sterling.

The service is becoming increasingly common in Europe. Santander, which owns Abbey, rolled out 4,500 ATMs offering the service late last year.

If you opt to pay in pounds, the retailer will convert your payment from the local currency into sterling, instead of your card provider back home.

In principle, the idea sounds great. You can see exactly how much will be coming out of your bank account, making the transaction a lot simpler and, on the face of it, a lot more transparent.

However, by choosing to pay in sterling, you put yourself at the mercy of the retailer, who will often apply an unfavourable exchange rate to your purchase. In many cases, you could be paying up to 4% more in extra fees.

Even then, unless you carry a calculator with you everywhere and are up to speed with your bank's exchange rates, it's almost impossible to know which the better deal is.

In addition, although the shop should orally inform you of the payment choice available, language barriers don't always allow this to happen. This can lead to you automatically being charged in sterling.

So you could end up being short changed without even knowing it.

A Fee Free Failsafe

So, what can you do to avoid being caught by these extortionate fees?

Firstly, it's nearly always best to opt for the local currency.

Although most UK banks incorporate a sneaky foreign currency conversion charge of around 2.75% on your purchases, the foreign exchange rates retailers offer are often much worse than the bank.

And if you have a card which doesn't charge any extra fees while you're abroad, then you won't have to worry at all.

For example, Fool favourite Nationwide does not levy any fees for purchases abroad on either its credit card or bank account.

In this case you should always opt to pay in the local currency, so you can be sure that Nationwide applies the conversion as opposed to the retailer, and you won't be stung with any extra fees.

The Nationwide credit card is also good because it applies positive payment hierarchy, which means you can spend knowing your most expensive debts will be paid off first.

Other credit cards which don't levy foreign transaction fees are the Goldfish i24 card, together with the Post Office and Saga.

Debit Card Deficit

DCC is not the only trick which can make your pocket feel lighter on holiday. If you have a bank account with one of the big four UK banks and pay for your purchases by debit card, you could also end up being caught out.

Here's a quick look at what the banks charge for debit card purchases abroad:

As you can see, paying with your debit card abroad can end up costing you much more than you bargained for. Lloyds TSB and NatWest charge £1 and £1.25 respectively per transaction on top of their currency conversion charge.

Lloyds TSB customers could opt for its Airmiles Duo credit card instead, which does not include the flat fee, and levies a lower conversion charge of 2.75%. Customers with this card also collect double Airmiles when using their card abroad.

Research, Research, Research

Although foreign transactions are far from transparent, there is no reason you can't avoid paying unnecessary fees.

If you really want to do you research, make a rough note of your bank's exchange rates and fees before you go away, and compare them with the rates given by the retailer which should be listed on the receipt or ATM screen.

DCC is not by default a rip-off, but be aware of the pitfalls of going for the easy option. Choose a credit card or bank account without foreign transaction fees and -- above all -- think twice before succumbing to that friendly face at the till.

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