Planning a trip? Then plan your money first

A holiday in Europe could cost you more than usual this year, as the pound flounders at record lows against a buoyant euro. But even if you end up paying more for hotels, food and shopping, you can save money elsewhere by organising your holiday money well in advance of going away.

There are so many foreign exchange options available – cash, traveller's cheques, credit cards, debit cards and pre-paid cards – that it's tempting simply to change a wad of money at the last minute and use whatever credit or debit cards are to hand once you reach your destination. But, thanks to all the associated charges, doing this is akin to throwing money down the drain.

Even if sterling recovers against the euro over the summer, or if you choose to go somewhere like North America, where the pound is very strong against the dollar, it is still worth planning ahead when it comes to your holiday money.

Finding the best foreign exchange deal

If you want to exchange money for hard foreign currency before leaving the UK, it's worth shopping around for the best deal from high-street banks, foreign exchange bureaux or online providers. Waiting until you get to the airport, ferry or train terminal will get you the poorest deals around – providers in these places use the convenience of their location to incur hefty commission fees or charge you more through their exchange rates.

Even when planning ahead, comparing exchange rates is tricky as they change on a daily basis and there are hidden charges to take into account. Many foreign currency providers have scrapped commission fees for exchanging money but make up for it in their rates, for instance. And some add a handling charge for each transaction.

The only way to make certain you are getting the most for your pounds is to ask several providers how many dollars, euros or rupees they will give you after all charges, and then choose the one offering the best deal. You can do this online using websites such as moneysavingexpert.com – they tend only to compare online providers, but this is no bad thing as online providers usually undercut their high-street equivalents anyway.

Paying for hard foreign currency with a credit card will incur a charge of 2 to 3 per cent because it is treated as an ATM withdrawal. But switch cards and some, but not all, debit cards charge you nothing.

Credit and debit cards: watch out for charges

By far the most popular and efficient way to withdraw and spend money once you are abroad is by using credit or debit cards. They rid you of the need to carry large sums of cash around, and you don't have to produce ID to use them.

On the other hand, you could find yourself paying unexpected charges every time you use them (see table). This year alone, British holidaymakers will be charged £686m for using their cards abroad, according to the comparison website uSwitch.

The first fee to watch out for is the "exchange rate loading fee", which most credit and debit card companies add, at an average rate of 2.75 per cent, to all withdrawals and purchases made abroad. The only notable exceptions are Nationwide Building Society and the Post Office, who charge nothing.

On top of the loading fee, there may be a cash withdrawal fee of about 1.5 per cent for debit cards and 2.5 per cent for credit cards. Check with your card provider to avoid any shocks.

Perhaps the most alarming fee is linked to a recent trend among certain debit card providers to charge you a "purchase transaction fee" – on top of the usual foreign exchange fee – every time you use the card for spending. The mode average of this fee is £1.50, so if you buy something worth £5 you end up spending £6.50 – make a lot of small purchases and the charges could add up to a hefty sum.

By now you might be feeling a little queasy at the thought of using your cards abroad at all. But there are ways to reduce the charges.

You could apply for a card that charges you nothing, even if you don't use it for the rest of the year. For credit cards, both the Post Office and Nationwide cards have no foreign exchange loading fees. The Saga card for over-fifties has no fee for the EU, but charges 1 per cent outside. For debit cards, the Nationwide Flexaccount Visa debit card has no loading fee and doesn't charge for withdrawing cash. It can take four weeks to get one of these cards, so plan early.

If you have no choice but to use a charge-laden debit card abroad, make sure you withdraw large sums of money so you can use cash for small purchases and reduce your fees. For example, by withdrawing foreign currency worth £300 using a Lloyds TSB debit card, you'd pay a fee of £1.50. If you made 30 transactions adding up to £300, you'd be forking out nearer £45.

Pre-paid cards and traveller's cheques

A newer and safe way to carry money around is a pre-paid card. You load as much cash on to your card as you think you'll need and then use it to withdraw money at ATMs or pay for goods. There may be a card issue fee – the Virgin Prepaid MasterCard charges £9.95, for instance – and other charges, so do check. The cards can be replaced fairly quickly if lost or stolen.

If you don't want to use cards at all, you might consider the trusty traveller's cheque. Although not as convenient as credit or debit cards for overseas spending – you must first find a bank able to exchange them, and then produce your passport – they are secure, as they guarantee your money back if lost or stolen. Traveller's cheques are available commission-free for foreign currency, although for sterling cheques there is usually a charge of about 1.5 per cent.