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If you want to save money while traveling abroad, you should think about various payment options available. Some of them perhaps should be discarded immediately - I am talking about various currency exchange services (frequently found in international airports and any popular tourist destinations) and banks. The reason is simple - the exchange rate offered is usually very unfavorable in comparison to the current market exchange rate.

Once very popular travellers cheques lost their appeal in favor of credit (or debit) cards with the development of financial networks and infrastructure. In fact, there are fewer and fewer places where you can make payments with cheques, whereas nowadays "plastic" cards are accepted almost universally. This change is not accidental - credit and debit cards, if chosen and used wisely, provide convenience not attainable with any other method of payment for your expenses. Paying with cards is equally handy for small charges at bars and cafes or large sums of money at check-out time in a five-star hotel.

This article does not discuss the advantages of credit cards vs. other payment options. Instead, it focuses on useful tips and important considerations while using credit and debit cards abroad.

Costs of Using Credit Cards Abroad

It seems that the only credit card issuer that does not charge the so-called foreign transaction fees (FTFs) is Capital One MasterCard or Visa cards (which come in many different flavors). In fact, these cards even "cover" the charges imposed on foreign transactions by Visa and MasterCard licensors (currently 1%). Thus, the cost of using a Capital One credit card to pay in foreign currency is zero. Add to this that most credit cards (Capital One cards included) use the current market exchange rate, and you will understand why Capital One one is the least expensive card for traveling purposes you can find.

To verify that all these claims are true, I was documenting during our recent trip in several countries all transactions charged to our Capital One NoHassle Miles Ultra and comparing them with official daily closing currency exchange rates. Based on this type of data, I found that actual cost of using this card was actually not zero but varied from 0.2% to 0.7%. This does not mean that the zero FTF claim is not true. From the credit card statement (which shows specific exchange rates applied in each and every case) it was quite clear that the effective exchange rate was fluctuating during the day. Therefore, comparisons against market closing rates cannot be accurate, and my calculations are useful only as an estimate of what happens in real life.

Credit Cards Vs. Debit Cards

Obviously, you can use debit cards in paying your expenses as well. But there are significant differences. Let's consider them.

First, about costs - same way as I was collecting data regarding our Capital One MasterCard, I was carefully monitoring transactions done with our Visa Debit card linked to the Millenium Bank account (this card uses PLUS as the main ATM network). Using same methodology as described above, I discovered that the use of this particular debit card resulted actually in cost savings (!) of 0.2% in comparison to daily closing currency exchange rates. This is a surprising result keeping in mind that ATM networks usually charge some fees of their own.

Again, because of the factors explained above, my approach to computing costs may be not the most accurate. However, just looking at actual rates used by the network and bank, I have an impression that exchange rates used in transactions were a bit better than the ones used by Capital One. Also, we used the debit card ONLY to get cash and never directly to pay for any of our expenses. This also may explain those tiny favorable differences I noticed - after all, you get you own cash!

To finish with costs in using debit cards abroad, I have to note that it's much more difficult to try to generalize any conclusions regarding debit cards. There is a lot of credit cards out there, but there are even more debit cards and many more factors that can influence costs of using a debit card.

The second aspect I wanted to mention is that you may want to consider different "strategies" in using debit and credit cards abroad. For example, you will never want to get cash (in foreign currency) with your credit card - using credit cards to obtain cash will always result in financial charges no matter where you try to do this and in what currency. This is one of the reasons why, while traveling, you should have with you both types of cards.

You should also keep in mind that debit cards (it would be hardly a mistake to say ALL debit cards) have daily expense limits. It does not matter where or how you use your debit card - to get cash or pay for lunch in a restaurant - your attempts to go beyond this limit (which is usually about $400 - $500) will be blocked. There are no such daily limits with your credit card (obviously, there is a credit card limit). One particular case where debit card daily expense limits may play tricks on you is when you offer such card to a hotel or rental car company as a deposit device (essentially to put on hold some of your funds) to guarantee your final payment. What happens here is that the "hold" amount, although never actually deducted from your bank account balance is considered by your bank for the purposes of the daily expense limit. Interestingly, for the hold transaction, the amount put on hold can often be greater than the limit. And if this is the case, you may exhaust your daily limits for more than one day (and effectively not being able to use the card for some time). The lesson here is that it may be wise to use your debit card only with ATM machines to get cash and use your credit card for all other transactions.

Other Considerations

This is a section where I would like to share some of our experience in using credit cards and useful tips based on it.

First, remember that the cost of using credit cards is not the only consideration in selecting a credit card for your voyages. The quality of service and care (of you as a customer) by your credit card issuer is not less important (and may be even more). Remember, you may face a lot of situations involving your credit card where the issuer's customer service plays critical role. Examples include (but not limited to) lost and stolen credit cards and fraudulent transactions - your ability to reach customer service at any time and customer service ability (and desire) to solve problems are paramount.

Research discussion boards to learn more about your credit card issuer. For example, you will find that despite the low costs of using Capital One cards abroad are, there are a lot of people unhappy with some practices pursuing by Capital One and quality of their customer service. Personally, we do not have any reasons to complain about either of these two issues - but on the other hand, we have never had cases where we would need Capital One customer service involvement.

Second, beware that credit card companies are becoming increasingly more and more concerned about credit card frauds. Very sophisticated computer systems constantly monitor all card transactions and, being programmed to detect (and block instantly) any charge that falls out of your unusual patterns, may create significant problems when you travel (after all, sudden charges coming from, say, Italy, do look suspicious). We, customers, should not blame credit card companies for doing this since it protects our interests as well. But because this situation is a reality that may very well happen to you (please believe me), you should be ready and know how to deal with the situation when credit card account is blocked by the fraud prevention system.

Have phone numbers handy anyway - you will have to reach the credit card customer service quickly to resolve the situation. But in this particular case, it's better to be proactive and call your credit card company before the departure, explain that your go abroad and provide them with your itinerary and types of legitimate charges that may be done against your account.

My recommendation is to have two credit cards. One of them may be your "main" credit card with credit limit high enough to cover all your estimated expenses - the second will be a back-up card which you will use while problems with the first one. In our case, we always have a Wachovia Visa that has relatively low FTFs (total 2%) and offers good customer service (based on Internet research).

Finally, keep in mind that some credit card payment terminals (mostly in Europe) accept only cards with embedded microchips. A typical situation where it may happen is an unattended gas station. At this moment (2008), credit and debit cards issued in the US will not be accepted at such locations. In particular, beware that US cards using RFID technology (like Chase blink card, American Express ExpressPay, MasterCard PayPass, etc.) are completely different from microchip cards and are useless in situations like this.