If you plan to buy something in a foreign currency, be it on holiday or shopping online, it's better to have a credit card with no foreign transaction fees added.
Most debit and credit cards come with foreign transaction fees averaging around 2-3% of the cost of the goods or service you paid for.
Read our guide to learn more about what a 'perfect' exchange rate is, and how you can get it with a no foreign transaction fee credit card.
A foreign transaction fee is not always just the one fee. Usually it's a combination of two charges; from your credit card network and your credit card issuer.
Your credit card network (such as Visa or MasterCard) will add a charge for handling the transaction between the merchant and your credit card issuer (such as MBNA, Natwest, etc).
The second charge, if applicable, will come from the credit card issuer, which adds up to a total fee of around 2-3% of the bill.
The foreign transaction fee does not only apply to purchases made in another country, but also to spending online in a foreign currency.
If you are shopping online and see that the items in your basket are listed in a foreign currency, then it's highly likely that foreign transaction fees will be applicable.
When on holiday, the fees can add up quickly if you are regularly spending on a credit card, so it's worth shopping around for a no foreign transaction fee credit card.
Some credit cards have no foreign transaction fees, which means that the 2-3% charge that is usually applicable on most debit and credit cards is waived.
This means that using a credit card with no foreign transaction fees can be one of the cheapest ways of spending money in a foreign currency.
Instead of being charged for every transaction on your credit card spend abroad or in a foreign currency, your payment will be converted to the local currency based on your credit card networks' exchange rate at the time of purchase.
This means that Visa and MasterCard's exchange rates will be applied to convert your spending into the local currency.
Many of the credit cards on the market that offer no foreign transaction fees do not necessarily come with any extra features other than this, so it's worth deciding whether or not you will use this card when you're not on holiday.
If not, then just make sure you keep track of your balance after you come back from your holiday, and let it sit in your wallet until the next time you spend in a foreign currency.
Although you save money by not paying any foreign transaction fees, you are still having your money exchanged by a third party, which is why this 'perfect' exchange rate is not exactly perfect.
The reason that 'perfect' exchange rate is always written with inverted commas is because a perfect exchange rate is impossible to achieve, even with a credit card with no foreign transaction fees.
Credit card networks such as Visa and MasterCard who exchange your credit card spend into the local currency will use their own exchange rates, not necessarily the 'actual' exchange rate.
Exchange rates are often given as a combination of the value of the currency over a period of time, not just on the day, and the credit card network's own pricing.
However, the more stable the currency is over a long period of time in comparison to GBP, the more likely it is that you will get a perfect exchange rate or as close to it as possible.
Essentially, this rate would probably be the best rate that you could get.
On the other hand, the less stable a currency is, the less likely that the 'perfect' exchange rate will match what the actual exchange rate is.
For example, if the dollar was experiencing significant fluctuation on a weekly basis then the 'perfect' exchange rate will be less accurate when you spend on you credit card in the US.
In such cases, it could be cheaper to buy the fluctuating currency in cash if you think it has reached its lowest point, but this requires making an educated guess and comes with risk that you won't have gained any value on your pounds.
Ultimately, the 'perfect' exchange rate you get with a credit card with no foreign transaction fees is most likely to give you the closest possible conversion to the currency you're spending in.
A 'no foreign transaction fees' credit card will only be referring to credit card purchases.
Credit card cash withdrawals will still be charged at the credit card's usual interest rate from the moment you take your money out and every day until you pay off the withdrawn amount in full.
Most credit cards will also charge a fee for withdrawing cash of around £3 or 3% of the amount. Some credit cards with no foreign transaction fees will waive this fee, but you will still be charged the daily interest.
Generally, it is best to avoid withdrawing cash with a credit card. If you are in need of cash, then a debit card cash withdrawal will almost always work out cheaper.
Debit card withdrawals will usually only charge a fee of around 1-3% for withdrawing the money, but there's no interest charged as the money is from your account, rather than credit.
Another potentially costly fee to avoid is the Dynamic Currency Conversion fee that could potentially be added to credit card transactions.
This is added on by the merchant you're purchasing from, and they will usually ask you if you'd like convert the cost of your payment into your currency instead of their currency.
The idea behind this feature is that it can help you understand how much you're actually paying instead of having to work it out using the exchange rate.
However, this feature comes at a cost to you as the exchange rate given will be decided by the merchant or their credit card payments processor.
This exchange rate is almost always worse than the exchange rate you would get from your credit card network. If in doubt, ask to pay in the local currency and always check that Dynamic Currency Conversion has not already been done for you without your consent.
Find a credit card with no foreign transaction fees.