Get the cash sorted out now to ensure there’s no holiday blues

Holiday money may not go as far as you planned with erratic currencies, odd conversion fees and inter-bank charges. Yet some forethought now can obtain maximum value out of UK sterling.

Consider several of the options available:

n small notes in local currency to pay for airport expenses, taxis, drinks, tips;

n debit card;

n credit card;

n pre-paid currency card;

n travellers cheques;

n foreign currency denominated account.

Almost every bank and bureau-de-change offers commission-free money. The crucial two points are the exchange rate – both purchasing and resale – and if fees arise when buying online.

Many of the latter work out far more expensive with an administrative charge (called a ‘cash-handling fee’) imposed either by the online seller or your bank.

For the range of options, start by asking your bank what facilities they offer but it’s vital to enquire about their transaction fees.

Many banking with Spanish-owned Santander (perhaps formerly with Abbey or Alliance & Leicester) may think it would be best for Spain but the type of account determines the charges.

Its Reward current account, which costs £120 annually, comes with commission-free travel money but its debit card costs 1.5 per cent to use (£1.99 minimum) whilst purchases incur a flat £1.25 fee plus a 2.75 per cent conversion charge.

Instead Santander’s Zero account has no fees with its debit card overseas. It is available to those with £10,000 in a savings, investment or mortgage account. No fee arises with Norwich & Peterborough’s Gold current account, which requires at least £500 to be credited monthly.

By comparison, Barclays increased its fee on debit card use abroad, whether for purchases or withdrawals, from 2.75 per cent to 2.99 per cent last November.

Credit cards can be one of the most efficient ways to purchase goods and services abroad with the bonus that statements record transactions in fair detail.

Watch though for foreign usage loading fees which can be up to 2.99 per cent with AA, American Express, First Direct, HSBC, M&S Money, Norwich & Peterborough and Virgin Money.

Instead, there is no such fee worldwide with Halifax Clarity, Post Office, Saga, Sainsbury’s Finance (Gold) and Santander (Zero), according to research by Moneyfacts. Nationwide has a formula whereby for every £5 spent in sterling, £1 can be spent in another currency without being charged commission and above this allowance, the fee is two per cent.

Avoid using credit cards to withdraw cash from machines overseas. Interest will usually be charged from the day of withdrawal and frequently at a rate around 28 per cent.

One key benefit of using a credit card is the extra protection if a service is not provided or goods supplied are faulty.

If the cost is £100-£30,000, the Consumer Credit Act is your protective umbrella.

A pre-paid currency card has three merits: knowing the sum available and the exchange rate in advance as well as protection if the card is lost or stolen. It is not a cheap option as it costs 1.5 per cent to place a credit (£3 minimum and £50 maximum) and there is a two euro fee each time it is used to make a cash withdrawal. Just use it like a debit card.

The Post Office Travel Money Card Plus can be used in 210 countries worldwide. Pre-load from £50-£5,000 (maximum £750 in-branch) in euros, US dollars or sterling. Caxton FX and Fair FX also offer pre-paid cards.

Keep a watch on a card’s expiry date as money unused by then cannot be transferred to another card or repaid. The good news is that providers usually give it to charity.

If holidaying abroad regularly or wanting larger sums, consider using a currency broker which should save on both the transfer fee, which can be £15-£40, and up to four per cent on conversion. Firms like FC Exchange and HiFX can pass savings on as they bulk-buy foreign currency at competitive times and have lower operating costs than high street banks.

Many use currency brokers to order at an agreed fixed price for delivery at a future date.

Take care before committing large sums after the collapse of Crown Currency Exchange in October which left 13,000 out of pocket by an estimated £20m.

The firm was registered with but not authorised by the Financial Services Authority which meant it was not required to keep client money separated in the event of liquidation.

For safety, only use a fully FSA-regulated and authorised broker which has had to prove it keeps client money separated and has sufficient capitalisation.

Avoid firms which require your full payment upfront for a forward contract, as well as those which need no deposit.

An alternative or additional way is to open a bank account denominated in your chosen foreign currency. Barclays, for example, offers a multi-currency account.

When selecting such an account, check what costs will arise when using it abroad and how many branches or partnership ones they have available.

For small sums, Travelex started a new service in April for just 99p per money transfer. Known as ‘Send Money Now’, it will transfer funds to a bank account globally although the fee rises if there is urgency (such as £7 for two days).

Travellers’ cheques still have their admirers. They were actually first introduced as long ago as 1772 by the London Credit Exchange Company for use in 90 European cities.

Ensure they are purchased in the currency to be visited as overseas countries frequently apply a poorer rate than cash. In the US, dollar travellers’ cheques are widely accepted but this is not universally the case.

They are safer than cash as – if lost or stolen – they will be replaced within 24 hours anywhere in the world without charge. However, this is provided each cheque has been signed at the time you take delivery. Keep a note of the serial numbers away from the cheques.

Pick up travellers’ cheques in bank, branch (as with American Express and the Post Office) and online. They have no expiry date and are usually commission-free.

Many providers offer free delivery for small sums, such as Saga on £300 (or £4.95 below). Over 70 foreign currencies are available through the Post Office including the recent addition of the Chinese yuan, which can be exchanged in over 2,000 Bank of China branches.