Spend time on your holiday cash before getting away from it all

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So many holiday budgets go wrong because little or no planning has gone into how best to pay when travelling abroad. Hidden charges and poor rates await the unwary.

Unlike most financial transactions, currency exchange is not regulated by the Financial Services Authority (FSA) or covered by the Financial Services Compensation Scheme. This means that if a company goes into liquidation before it supplies your order – as Crown Currency Exchange did in 2010 – your money may be at risk.

Purchasing in store and receiving the funds immediately is therefore more secure but may mean missing out on the best rates.

The five main ways to fund costs overseas are:

• foreign currency notes/coins

• travellers cheques

• prepaid cards

• credit cards

• debit cards

Frequent travellers – perhaps with a home outside the UK – may wish to set up a bank account in that country which is an inexpensive way to pay for utility and similar regular payments.

Take some foreign notes for immediate use. This is not only for tipping and small purchases like drinks and taxis but because the rates here are likely to be better. Do not assume that all other charges can be met by plastic money. NS (Dutch Railways), for instance, will not accept foreign cards except at Schiphol airport.

Whilst currency is usually commission-free, look not only at the conversion rate but if the provider or your bank will also buy back unused money.

Several online exchange agencies shout loudly about their keen rates but make no mention of the mysterious additional charge that frequently appears on bank statements because the facility has been regarded as a cash advance. Following an Office of Fair Trade ruling, banks have agreed to stop making such charges later this year.

The worst exchange rate is usually at a point of departure. Do not assume your bank has a keen rate. It may be far better to go to a specialist. Thomas Cook offers 75 currencies and reserves its best rates for purchases online followed by collection in one of its 700 stores.

Consumer campaigner Which? recently researched rates across the UK including Leeds and Sheffield and found considerable variations, even regionally from the same provider. It found that the UK’s largest high street foreign currency supplier, the Post Office, offered only 565 euros in Sheffield for £500 but 574.85 in Manchester and 578.50 in London.

Conversely, Thomas Cook favoured Yorkshire with 585 euros in Sheffield and 583 euros in Leeds but 553.80 in Manchester – a difference of over 31 euros.

Marks & Spencer offers the same rates nationwide and makes no extra charge if its own credit card is used, which may mean a holiday is completed before payment has to be made. Which? found no significant regional change with Sainsbury’s but some at both Asda and Tesco which may reflect local competition like petrol prices.

Travellers cheques were first issued as long ago as 1772 by the London Credit Exchange. Thomas Cook popularised them from 1874 but it was American Express – today the largest issuer – who really ensured their global acceptance. The latter realised the potential in 1891 when its president had difficulties obtaining funds with letters of credit in several European cities.

Wherever possible, purchase travellers cheques in the denomination of the country to be visited so that the exchange rate is known and does not depend on the whim of a hotel or local bank. Expect to pay two to three per cent purchase commission but no charges for encashing.

For security, always sign immediately upon buying travellers cheques and keep a note of the serial numbers in the event of loss so that their full value can be replaced.

Prepaid cards look like credit or debit cards but you decide on the amount to be loaded onto them. Like travellers cheques, it makes sense to have such a card in the foreign currency to be used so that the rate is known.

There is no risk of getting into debt as the card will only allow you to spend up to the preset limit. There is security as if the card is used fraudulently, the money can be claimed back. If lost or stolen, contact the provider who will issue a replacement. You can also obtain one even if you have a poor credit history. Check if a prepaid card issuer is to charge for the card, avoid cashing through a machine abroad as there are hidden fees and ask if there is a charge for topping-up the credit.

Yorkshire Bank launched its ‘cash passport’ or prepaid currency card last month, available in sterling, euro and US dollar. It is available instantly without additional application forms. If withdrawing cash at an ATM, the charge is £2.50 or 3.75 euros or US$4.50. If unused after a year, a monthly fee of £2, three euros or US$3.50 will be debited.

Credit cards are incredibly popular for buying goods and services abroad. Not only does this mean a detailed statement is later available but the currency conversion will be executed at or close to wholesale rates.

The downside is a 2.75 per cent handling charge will typically be levied. This fee will not appear separately on any statement but forms part of the overall transaction charge.