This article is taken from Merryn Somerset Webb’s free weekly personal finance email, MoneySense. Click here to sign up now: MoneySense
As the weather at home gets worse and worse the eyes of the UK’s holidaymakers are beginning to shift abroad. Holidaying in Wales was all very well last year when the sun shone every day all summer. But this year it’s hard to see the attractions.
The popularity of holidaying at home means that all the nice seaside houses not only charge extortionate rents but were booked up months ago (even back in February I was hearing complaints from fashionable friends that they were too late to book seaside houses in Cornwall for August); the weather is awful; our transport system is a disaster (standing room only on most trains to Cornwall); and despite the best efforts of Rick Stein and Jamie Oliver most provincial pubs and restaurants still serve truly revolting food.
Abroad, houses are easy to come by – there’s still a huge glut of rental houses in the South of France for example, everything’s much cheaper and while flying is a pain, at least you get a guaranteed seat on an aeroplane. Finally this year there is one more good reason to go away; the pound is at its highest against the dollar for 26 years and at multi-year highs against the euro. So wherever you go you’ll be paying less for everything you buy and do when you get there.
In fact the only real problem with going abroad for your holidays is that the second you step off the plane you have effectively offered your bank an open invitation to rip you off. And it is one they will take up very enthusiastically. We all know that our high street bank’s main aim is to constantly find new ways to separate us from our cash but few of us, caught up in the excitement of holidays, really know quite how good they are at it when we are away.
Use your debit card abroad and your bank will first use a lousy exchange rate to work out how much your foreign currency will cost you. Next they will charge you around 2.75% of the value of the money you are spending as an “exchange rate adjustment charge” or “foreign exchange loading fee” (some charge as much as 3%!). Finally your bank will add on a flat fee every time you use the card to make a purchase – these can be up to £1.50 a go.
And don’t think you can avoid the charges by withdrawing cash from an ATM instead of using your card in a shop because you can’t do that either – you’ll still get hit with the conversion charge then with a fee of between 1.5% and 2.5% of the value of what you take out with an average minimum of £2.00. So take out £100 and it could cost you not far off £5. Take out small amounts often and that will add up fast. Indeed overall we pay around £350m a year in charges for using our debit cards for withdrawing cash in Europe alone.
So what can you do to cut the level of charges you pay? You could simply switch your business to Nationwide Building Society – they charge no loading fee on their cards. But a better option might be to look at a prepaid currency cards. These are relatively new to the market but the more I look at them the more I think we should all be bypassing our banks to use them, or at least to use the best of them.
The most well known come from Travelex (the Travelex Cash Passport) and from the Post Office (The Post Office Travel Money Card). Both can be loaded up with dollars or euros at home and then used abroad in the same way as a debit card hence avoiding all the charges associated with a bank debit card. That said neither of these cards are my favourite – they come with too many charges of their own. The Travelex card charges a loading fee of 2% (that’s £10 when you put £500 on the card) and a monthly inactivity fee if you don’t use the card. It also charges you £2.50 every time you use an ATM. The Post Office card charges a one off fee of £10 to load the card (so if you only put say £250 on it you are already down 2.5%) then takes £2 every time you withdraw money from an ATM and £35 if you lose the card and want a replacement. It’s all good in the ory but not quite there in practice.
Good news then that this month brings a new entrant to the market in the from of the Caxton FX card. This one is not perfect either – it still charges an ATM withdrawal fee (albeit a lower one of 2 euros) but in all other respects it is a vast improvement on the other cards. Assuming you apply for it and manage it online (where you can both load the card and view full statements recording its use) there are no other charges at all.
Better, Caxton offers one of the best exchange rates on the market. On Wednesday last week £1 bought you £1.4530 euros with Caxton. With Travelex it bought you only 1.39 euros. On £500 that’s a difference of over £30 or pretty much the cost of a flight to Marbella, and that’s before you start adding in the other fees charged by the other cards. The PO was offering a slightly better rate at 1.4069 but that still puts Caxton £23 ahead and £33 ahead if you remember that the PO charges you £10 to get a card in the first place
Finally it’s worth pointing out that most pre paid currency cards are Visa Electron cards. These are not accepted by huge numbers of outlets but the Caxton card is a Mastercard so you should be able to use it almost everywhere. If I were in charge of the ripping people off via their debit cards departments at one of the big banks this is a product that would make me really nervous.