Flexible friends can drop you in it

Alan Whicker got on his bike to extol the virtues of travelling with a credit card, advising "Take a Barclaycard. Over six million places do." Rival card provider American Express went a step further, trademarking its "Don't leave home without it" catch-phrase.

Alan Whicker got on his bike to extol the virtues of travelling with a credit card, advising "Take a Barclaycard. Over six million places do." Rival card provider American Express went a step further, trademarking its "Don't leave home without it" catch-phrase.

The message is clear: when travelling to far-flung destinations you should pack your plastic along with your beach towel. Cash, and a visit to the bureau de change, we are told, leads to a poorer deal.

Credit cards take away the hassle factor. Most foreign exchange bureaux charge commission of anything between 2.5 and 3 per cent or a minimum of £3.00 for changing money or purchasing travellers' cheques, while many impose a further charge for converting back any remaining foreign currency at the end of your trip.

Credit cards are safer too; if your card is stolen or you lose it, all it takes is a phone call to cancel it and order a new one. And with 17 million places accepting Mastercard and Visa, you are unlikely to find your card is rejected.

But using a credit card to withdraw money or pay for meals and drinks abroad can work out far more expensive than using traveller's cheques or obtaining foreign currency. Not only do you not know what the exchange rate is on the transactions you make, many customers are unaware that card providers add on their own charges - 2.75 per cent per transaction is typical. You won't know how much you have actually spent until you get home and check your next credit card statement. For many, it can be quite a shock.

Over the next couple of weeks, we will be looking at holiday money rip-offs, naming and shaming the worst offenders who slap on the highest charges when you use your credit card abroad.

There is no industry standard; card providers quote a host of different factors which they take into consideration when calculating the exchange rate. "There are two charges: the interbank rate, which we pay for converting large sums of money into sterling, and on top of that a foreign currency conversion charge," says James Tobin, vice-president of public affairs at American Express. "This is 2 to 3 per cent and is charged by all card issuers. It covers administration and the risk in the spread."

Most card providers use a standard foreign exchange rate, taken from when the transaction is processed, rather than when you make the purchase or withdraw cash. This is set by Visa or Mastercard, depending on the card, and is an average of the market spot rates at the end of the day.

These rates are fairly standard and tend to be better than those in high-street foreign exchange bureaux because transactions are carried out in bulk using the money market rate, rather than tourist exchange rates.

The difference between card providers arises when it comes to adding the "currency conversion loading" charge or foreign transaction fee. Most providers don't flag this up so the card holder may not discover it until they get a statement and find an extra 2 or 3 per cent added on to the transaction.

Barclaycard, for example, "adjusts" the cost of the transaction by adding on a 2.75 per cent fee. If you spend £1,000 on your credit card, this is an extra £27.50 on your bill. But card providers believe that holidaymakers who use cards expect to pay a little more for the convenience factor. "The driving force behind using a credit card abroad is the convenience factor, rather than trying to save every last penny," says Mr Tobin.

Yet even though card providers say the extra transaction fee is standard, Nationwide proves that it isn't, abolishing its foreign transaction charge last year. So if you use your Nationwide Visa card abroad, there are no hidden charges. You only need to consider the foreign exchange rate, which is similar to most other lenders anyway.

Terry Brewer, who is based in Worcester, switched to a Nationwide Visa card last year because he wanted a credit card that would not impose high charges when he used it on holiday. "I always get a much better rate of exchange and get charged no commission when I use my card," he says. "I never take money abroad. I feel much safer because I don't have to carry loads of cash."

Mr Brewer uses his card both for purchases and to withdraw cash and has never once had it rejected or been unable to find a cash dispenser.

Many of us also use our credit cards to withdraw cash abroad; the growing number of linked cash dispensers makes this quite straightforward. It is particularly handy if you travel to more than one country as you don't have to worry about obtaining different currencies.

But there are fees to be paid on cash advances too, just as there are in the UK. These vary between lenders; most charge a 1.5 per cent handling fee or minimum £1.50 per transaction. You need to check with your card provider which applies - if it is the latter it won't be cost-effective to withdraw small amounts of cash. Be wary of some providers, such as Capital One, which adds on the 2.75 per cent loading charge, leaving you with a total charge of 4.25 per cent for withdrawing cash.

Debit cards can also be used overseas; most providers add a foreign exchange fee of between 1.5 and 2.25 per cent. The advantage of a debit card is that you won't have to pay interest on the amount as it is debited straight from your account. Credit cards are very expensive if you don't clear your balance at the end of the month and have a card with a high annual percentage rate (APR)

Barclaycard, for example, has one of the highest APRs around (19.4 per cent) so if you don't clear the bill at the end of the month, that plate of paella will cost you a lot more than you bargained for.

If you predict that you may find yourself in this position, switch to a credit card with a lower APR before you travel. RBS Advanta offers an introductory rate of 4.5 per cent APR on new purchases until March, while Tesco offers 4.9 per cent on purchases for six months, giving you time to clear your debts.