This disaster will ruin your holiday

Don't let this disaster ruin your holiday, as it has for many thousands of passengers this week.

You’re queuing up at the airport departure gate, happily imagining your upcoming fortnight’s holiday, drinking cocktails lying on the beach. Suddenly, an announcement comes on over the tannoy. You’re told that the airline or tour operator you booked the deal with has gone bankrupt. Not only has your flight been cancelled, but your travel insurance won’t pay out for a refund!

Believe it or not, this actually happened to thousands of people this month when three travel companies went bust: Goldtrail, Sun4u and, today, Flight Options, the parent company of Kiss Flights. An estimated 13,000 passengers are currently stranded abroad, while tens of thousands of people who have booked holidays now cannot go.

What should you do if you've been affected - or if something similar happens to you?

The ATOL scheme

There is a scheme specifically for tour operators known as the ATOL scheme, operated by the Civil Aviation Authority.

If you book a holiday through a tour operator that is registered under this scheme and it goes bust, ATOL will compensate you.

Kiss Flights, Goldtrail and Sun4U were all part of this scheme, so you can claim a refund for the ATOL-protected elements of the holiday from the Civil Aviation Authority.

The trouble is, it can take a long time to get your money back, as some affected customers are finding.

There is, however, a silver lining for customers who used either a debit card or a credit card to pay for their holiday.

If you use a debit card...

Under the Visa Scheme Rules, which visa debit card issuers subscribe to, you can use the Visa Chargeback scheme to reverse a transaction if the company is in breach of contract (i.e. has failed to provide you with the hoilday you booked). It also applies if your debit card has been used frauduelently.

Mastercard offers a similar scheme for its debit cards, but the scheme does not apply to purchases made with a Maestro debit card.

You should address your claims to the bank that provides your credit card, which will in turn put in a request to holiday company's bank, which should pay up. Just bear in mind that there is a 120 day time limit on claims, which starts from the day you become aware of the problem.

You can go to the Financial Ombudsman Service if your bank fails to pay up.

If you use a credit card...

Similarly, if you paid for even £1 of your holiday with your credit card, you should be able to get a full refund.

This is because, if you make a purchase of a single item worth £100 or more and you pay for any part of that purchase with a credit card, you are protected under Section 75 of the Consumer Credit Act.

Under this act, your credit card provider is jointly liable for the provision of the goods or services you paid for, along with the firm you bought them from. So if the firm goes bust and therefore can’t supply you with your holiday as agreed, the credit card company is legally obliged to compensate you.

John Fitzsimons looks at some common mistakes we make with our travel insurance that hit us in the pocket

The fact that you only need to pay a £1 deposit on your credit card is is useful to know because there is often a 2% or 3% fee for paying with a credit card. Paying just £1 can therefore save you a substantial amount of money while still ensuring you’re fully protected.

Remember that each single item has to cost £100. So if you buy two single flights in the same transaction, but each costs £99, you aren’t covered. But if you were to buy one return flight for the same price (£198), you would be covered. It depends entirely whether the items were sold to you separately or not.

All credit cards offer the same level of consumer protection, both in the UK and abroad. So all providers have to compensate you under Section 75, and if they fail to do so, again you can seek redress for free from the Financial Ombudsman Service.

Which credit card should you use?

If you're going to take advantage of Section 75, it's vital to choose your credit card carefully. The right choice can make a huge difference to your finances.

For example, if you don’t have enough money to pay for your purchase upfront, use a card that charges 0% on purchases to pay for it. That way, you won’t be charged any interest on the sum you borrow and can pay it off gradually over a set period. Read The card you must have for purchases for more information about the best card to get at the moment.

Paying off your bill in full

What about if you do have enough money to pay for your purchase upfront? This is where you get to have a bit of fun. Most people think that credit cards place you in debt and cost you money – the reality is, if you can afford to pay off your bill in full each month, you can actually make money from your credit card, as well as benefiting from the Section 75 consumer protection.

This is because one type of card, a cashback credit card, gives you back a set percentage of the money you spend on the card.

And the good news is, there is a card available at the moment that combines an interest-free period with cashback for spending. Read Get paid to spend interest-free to find out more.

Just bear in mind that cashback cards are only appropriate if you pay off your bill in full each month. Otherwise the cost of the interest you pay far outweighs the cashback you earn.

Moral of the story

If you’re not disciplined enough to use your credit card correctly, you can get into a lot of debt. But if you understand which credit card to use and when to use it, the benefits of handing over that small piece of plastic can be enormous. Not just financially, but for your own peace of mind as well.

Take control of your finances and make an informed decision using the lovemoney.com credit card comparison service. This compares all the credit cards in the market and should help you to find the right one for you.

Compare credit cards at lovemoney.com or get a travel insurance quote