How to beat the holiday spending traps

Heading abroad for a well-earned break from talk of the recession and unpredictable weather? You may be in for a shock when you get the bill for the first drinks of the holiday.

While the pound has recovered from the worst of its lows against rival currencies, it still buys a lot less than it did 12 months ago.

A year ago, the pound bought about 1.25 euros. Today, the typical tourist rate is 1.12 euros, a 10% drop. Likewise, sterling is down by nearly 20% against the US dollar.

Lower rates mean it is more important than ever to get the best deal on foreign exchange to stretch every cent out of your holiday cash.

Buying foreign currency before you go

For many travellers, the holiday starts with the excitement of collecting their foreign currency in a plastic wallet.

Buyers can order online, buy over the counter at High Street bureaux de change or leave it to the last minute and pay 'top dollar' at an airport or international rail station.

Do not be fooled by 'commission free' or 'zero% commission' offers. While virtually all High Street and online currency dealers promote themselves as commission free, they make their money on the margin between the daily wholesale exchange rates and the rates they charge you. Some outlets help themselves to a far bigger margin than others.

Instead, focus on the true cost of a deal by looking at exactly how much of your destination currency a fixed sum of sterling buys at different outlets. Allow for all charges, including delivery fees. The true cost of currency starts at about 3% buying in bulk on the internet, rising to between five and 6% on the High Street and to a staggering eight to 12% at the airport.

Travel money specialist fairfx.com surveyed the true cost of buying currency and found there was a difference of 120 euros (£100) between the best and worst cash deals for a traveller with £1,000 to spend.

But even if you shop around and order currency, there are still pitfalls. Some UK banks levy a foreign currency fee if you use a debit card to pay for currency, even though the transaction takes place in this country and the bank is billed in sterling. Barclays, for example, charges 2% (minimum £1.50, maximum £4.50), while Lloyds TSB charges a 1.5% 'handling fee' (min £2, max £4.50) unless the purchase is through one of its bureaux de change.

We get £500 in one go and save on fees

Accountant Brian Walker, 63, and his wife, Olive, 65, have a holiday home near Grenoble, south-east France. Olive, a history teacher, uses her M&S Money credit card to buy euros. Cardholders enjoy a concession for buying cash via Marks & Spencer's bureaux de change or online ordering service.

Rather than being treated as a cash advance and starting to accrue interest from the date of withdrawal, currency transactions are classed as a normal purchase. So there are no extra fees and customers have up to 55 days to pay the bill without paying interest.

Olive, from Liversedge, West Yorkshire, says: 'I always phone up and order more than £500 in one go so there is no postage charge. It arrives next day by special delivery and then I know that I don't have to worry about paying for it for another month. I've looked at some of the other currency providers on the internet, but when you do the sums you are only saving a couple of pounds and sometimes might have to wait a week to get the currency. I'm happy to stick with a brand I trust.'