Shop around for the best rates before using your cards abroad

Having the right plastic when you travel makes spending a treat, writes Annie Shaw

Paying for goods and services with a credit card when you travel abroad is increasingly popular, as travellers are reluctant to carry large amounts of cash, and travellers' cheques seem cumbersome and old-fashioned in an electronic age.

Paying for goods and services with a credit card when you travel abroad is increasingly popular, as travellers are reluctant to carry large amounts of cash, and travellers' cheques seem cumbersome and old-fashioned in an electronic age.

According to banking industry research, as many as 65 per cent of us use plastic to pay for things when we are on holiday abroad. However, it pays to plan which card to use: the wrong one can cost you money in needless charges; another might actually pay you for making transactions.

Lucy Hunter, credit card manager, at Sainsbury's Bank, says: "There are many advantages to using credit cards abroad, including not having to carry around travellers' cheques and your passport or large amounts of cash. They give you the flexibility to withdraw money easily wherever you are in the world, and you can use them in most shops and restaurants. However, not all cards are the same, and it is important that the card you use offers a competitive rate of interest, especially if you don't anticipate clearing your balance at the end of each month."

Most card providers, including all the big high street banks, charge a 2.75 per cent fee for overseas use. This fee is called "exchange rate loading" or "foreign transaction fee" and is incorporated into the currency conversion rate you will see on your credit card statement. Research by Saga Visa Card reveals that a family on holiday in Europe, putting £1,200 on their card and using a cash machine to take out £500 worth of euros, would typically pay over £40 in charges.

However, it is possible to avoid these charges by choosing a card that does not levy them. Among those waiving these fees are Nationwide and Lombard. Several others, including Liverpool Victoria and Saga (whose card is operated by Liverpool Victoria), charge nothing in the European Union and only 1 per cent outside. Among those charging less than 2.75 per cent are: Amex Gold, free in the EU but 2.73 per cent in the rest of the world; NatWest Black Mastercard, 1.5 per cent in Europe and 2.75 per cent in the rest of the world; Citi, 2 per cent throughout the world; HSBC Gold and Platinum Visa and Cahoot (2.25 per cent); Clydesdale Gold and Tesco (2.5 per cent). Nationwide also pays you cashback on all your purchases, 1 per cent for the first six months and 0.5 per cent thereafter.

When you take money out of a cash machine with a credit card you will pay the exchange rate loading and a cash-handling fee of around 1.5 per cent. In many countries, including the US, you may also find yourself paying an additional $1 (55p) or $2 each time you use an ATM. These charges will also be levied on debit card transactions, though the exchange rate loading element is likely to be a percentage point or so less than for credit cards.

Moreover, if you withdraw cash on a credit card, most cards will charge interest immediately without giving you an interest-free period.

But if you choose the right card it can actually be cheaper to get cash out of a cash machine with a credit card than with your debit card. According to Natalie Tate, a spokeswoman for Nationwide, a £100 cash withdrawal with a debit card from an overseas ATM would cost £4.90 from NatWest; £4.25 from Halifax, HSBC and Lloyds TSB, and £3.75 from Barclays. However, with a Nationwide card, assuming that the balance is cleared in full one month after making the transaction, the building society's charge, including interest, would be £2.34 for the Classic credit card and £2.49 for the Cash Reward card.

Ms Tate adds: "If the customer was using a Classic credit card and is in their first six months, they will not be charged interest on the cash advance, so it will only cost £1.25, the cash advance fee."

If you don't have a credit card that waives interest on your cash withdrawals, you can top up your card before you go and save the charge that way. Better still, if your card is Liverpool Victoria's it will pay you up to 4.5 per cent interest on credit balances, so you can use it as a savings account as well as for purchases. Of course, you can only take advantage of cashback if you repay your balance each month; otherwise, higher interest rates will wipe out the benefits. Sainsbury's Bank warns that 7.8 million people will take longer than one month to clear their summer holiday credit card balances, with over 2.58 million people expecting to take six months or more.

If you qualify for a Saga card (you have to be over 50), you can take advantage of a triple whammy: no exchange rate loading in Europe; no interest on cash withdrawals if the balance is paid off in full each month (compared with a typical rate on other cards of 2 per cent); and, until the end of December, and no charge to withdraw cash at home or abroad from Visa ATMs, as long as bills are paid in full each month. Finally, Saga is offering 0 per cent interest on all purchases, as well as cash withdrawals for six months for people who apply for a Saga Visa Card before 31 December.

If you are not eligible for a Saga card, or you are not going to be able to pay off the balance by the end of December, you can combine cards to get the best deal: a cashback card with no or low exchange rate loading for your spending, then one with a 0 per cent interest-free period to transfer your balance to.

Sainsbury's Bank is offering Standard and Platinum credit cards with 0 per cent APR on purchases for 12 months, which it says is the longest rolling 0 per cent period available.

When you use your credit card in this country you get valuable protection under the Consumer Credit Act. Section 75 of the Act makes card issuers jointly liable with suppliers if the consumer has a valid claim against the supplier, as long as the cash price of an item is more than £100 but no more than £30,000 and the credit limit is no more than £25,000.

Until now the situation with overseas purchases has been unclear. The Office of Fair Trading believes that Section 75 does cover overseas purchases, and last month it went to the High Court for clarification. The hearing has now concluded and a ruling is awaited, which could take several months and be liable to appeal.

In the meantime, although they do not agree with the OFT's view, HSBC, Bank of Scotland and Sainsbury's Bank have announced that they will honour valid claims for purchases made abroad.

'It's my whole banking system'

Anne Brennan likes her Liverpool Victoria card because it does not charge her exchange rate loading.

She goes to Cherbourg in France regularly and uses the card for purchases and to withdraw cash. This year she went further afield, so she had to pay 1 per cent each time she used the card.

"I went on holiday to Antigua with a girlfriend earlier this year," she says, "so I topped up the card with about £1,000 before I went. I like to do this because I get interest on it while the card is in credit, and I know the money is fully protected if I lose the card. The card is my whole banking system."