Credit card Guides

What’s the best credit card to use abroad?

Monday 23 May, 2011

By Martin Fagan news@consumerchoices.co.uk

Packing your plastic for an overseas jaunt is a smart move, but only if you pick a card that doesn’t charge you a fortune in foreign fees.

Despite a recent drop in the number of UK citizens holidaying abroad, millions of Brits still venture overseas every year.

And practically all who ventured abroad carried plastic, spending £11billion on debit cards and £14billion on credit and charge cards, according to research by the Association of Payment Clearing Services (APACS).

With a typical bank charge of 2.75% applied to overseas withdrawals, total charges for consumers using their cards abroad totalled £685.5 million in 2009 - an average of £11.73 per trip.

People who go on holiday for a long period and pay their way with frequent use of their plastic can end up with a nasty surprise when they return, opening their card statements to discover they’ve been hit with accumulated charges of over £100.

Travellers’ cheques have their attractions, as does taking enough cash in the local currency to see you through the first few days.

However, for many, credit and debit cards are the most convenient and secure way of spending money overseas. The trick is picking plastic that doesn’t clobber you with withdrawal fees.

Credit card fee types

Issuers of credit cards are crafty. They make that collective £685million a year by levying various types of fees that, although detailed in the very fine print of your card’s terms and conditions, are not exactly obvious or forthcoming. And they don’t just hit you with one of these fees. Often, holidaymakers have to pay a number of fees on each separate transaction.

The first is a foreign exchange fee or “loading” fee (sometimes called a “handling” fee). This is the charge made to convert the value of the transaction from the local currency into sterling. On average this adds around 2.75% on the total cost of the transaction and is “hidden” in the exchange rate conversion so it doesn’t appear on your statement.

For example, if you’re in the US and spend $100 in a transaction, the loading fee (let’s say 2.75%) is added to make $102.75 and then it’s converted by the exchange rate into sterling, but it only appears as $100 on your card statement.

This practice was highlighted in December 2010 following an investigation by The Guardian newspaper. The newspaper also found RBS and Tesco had started using their own exchange rates to convert overseas purchases into sterling, which added an extra mark-up of about 2% or more on top of the published 2.75% foreign exchange fee.

The vast majority of UK credit card providers use the Visa and MasterCard exchange rates, which are very close to the wholesale market rates and therefore tend to be quite favourable.

The only way to know if you're being charged a loading fee is to check your terms & conditions, or ask your card issuer.

Another fee is the cash withdrawal fee. Fairly self-explanatory: you pay this fee when you withdraw cash at an ATM. This fee is usually anything up to 3% of the value of the cash withdrawn or a minimum of £3 to a maximum of £5.

If that weren’t enough, on top of the cash withdrawal fee, because you’re withdrawing cash in the local currency, your card issuer will probably also hit you with the foreign loading fee, therefore withdrawing cash can mean a fee double-whammy.

In addition to the fees, when a cash withdrawal is made, remember interest is charged immediately. Any interest-free period (typically over 50 days) that can apply to purchases made on the card doesn’t apply to cash withdrawals. So this adds to the overall raft of charges even if you religiously clear your card’s balance every month.

Types of debit card fees

As well as credit cards, most people carry around a debit card and many believe the best course of action is to use the credit card in shops and restaurants and the debit card for withdrawing cash.

But debit cards also levy fees. As well as foreign loading and cash withdrawal fees, debit cards can also levy spending fees, a one-off flat fee for every transaction you load on the card while abroad, which can make the repeated use of a debit card less economical than credit cards.

The other financial sting to watch out for when abroad – even though it’s not a fee levied by your card issuer – is something called “dynamic currency conversion”.

This is when shops and restaurants allow you to pay in your “home” currency (sterling) which sounds like a good idea because, by paying in sterling, you’ll avoid all those pesky fees the card issuer slaps you with.

However, rather your card issuer calculating the rate of exchange (which is generally more favourable)it’s calculated by the merchant who can set any rate of exchange they see fit to charge.

Pick the zero option

So knowing all the fees card issuers will stealthily add to your bill, the cheapest way to spend money abroad is to pick a card that doesn’t charge fees.

The best deals offered by card issuers change all the time, but the only cards currently offering no foreign loading and no cash withdrawal fees are the Halifax Clarity Card and the Santander Zero card.

However, although neither card levies a cash withdrawal fee, both cards charge immediate interest on cash withdrawals and this interest is charged even if you pay the balance off in full. Halifax charges an APR of 12.9% on cash withdrawals but the Santander card charges an eye-watering 27.9%.

Membership has its pros and cons

Many people seeking a credit card to use abroad also look for a card that carries perks such as AirMiles or free travel insurance. Be aware – these types of cards make you pay for the privilege, they don’t offer the most competitive interest rates and generally hit you with foreign transaction fees even though you’re paying a monthly/annual fee just to own one.

One notable exception is Sainsbury's Gold Credit Card (www.sainsburysbank.co.uk). It charges an annual fee of £60, but there are no foreign loading or cash withdrawal fees and, as long as you pay the balance off in full at the end of the month, no interest charges on cash withdrawals.

The card also comes with free annual family worldwide travel insurance for two adults (up to age 65) and up to six children under-16 (or under-23 if in full-time education) and 17 days’ winter sports cover a year. Cardholders even earn Nectar points on their overseas spending.

Although it’s a great card to hold when travelling abroad, potential cardholders need to weigh up whether the “free” travel insurance is worth paying the card’s annual fee for.

Regardless of which credit card you take on holiday, you’re covered by Section 75 of the Consumer Credit Act 1974.

This makes the card provider equally liable (with the supplier) for any goods between £100 and £30,000 that you pay for by credit card while abroad which either prove faulty when you get home or else fail to arrive back in home in your suitcase.

Top tips for using cards abroad

• If you’re abroad and using a card that charges fees, try to make as few cash withdrawals as possible, opting for bigger withdrawals but fewer of them, rather than withdrawing multiple small amounts.
• The same goes for making purchases. For example, one purchase of £300 may cost you £5 in fees but purchasing three items at £100 each using your card three separate times may end up costing £15 in fees.
• Check to see if your card company operates a payment hierarchy system. This means some providers leave cash withdrawals as the last transactions to be paid off, so they can charge you higher rates of interest for longer. Not something you need to worry about if you pay your card off in full every month, but if you regularly leave an overhanging balance from month to month, it’ll cost you.