With rising fees making cards expensive, Ian Hamilton explores alternatives for overseas spending.

In the 1990s, the credit card became a boon for overseas travellers because it was a convenient and cost-effective way of managing purchases and accessing spending money around the globe. Not so nowadays. It still offers great convenience but escalating fees and charges make them more costly than travellers' cheques.

In other words, you'd be mad to assume that this is the most cost-effective way of getting around.

A decade ago it was a different story, with few fees levied on overseas card transactions and ATM withdrawals. These days international credit card purchases typically incur a foreign currency conversion fee of 1 to 1.5 per cent. This may be on top of a raft of other hidden charges (see table right).

When reconciling international transactions, some institutions pass the wholesale exchange rate they pay on to the customer, says the senior consulting director at Fujitsu Australia, Martin North. Others add a margin to skim a bit more revenue from the conversion transaction.

"You never quite know [what that will be] because the rates are volatile and change from day to day, so there is no transparency," North says.

Cash advances typically draw either a flat fee of $4 or a 1.5 per cent scaled fee. Then there are interest charges on top. Visa and MasterCard cash advances incur interest from day one, not just on the amount of the advance but on all previous purchases outstanding, warns the senior portfolio manager in deposits at St George Bank, Julie Pettiford.

"That's the thing often overlooked by people. Your interest-free period is wiped out as soon as you take a cash advance," Pettiford says.

That spells trouble for many travellers, who are carrying hefty balances and being charged up to 17 per cent annually on their card. Putting the card account in debit so you can withdraw your own money as you need it from ATMs is a sensible strategy that can minimise fees, depending on the bank.

Overseas withdrawal fees range from $1.25 to $4 per transaction (some gold cards waive the fee).

Visa debit and ATM cards offer a convenient, interest-free way to access your own savings accounts for cash while travelling. Internationally, the Cirrus, Maestro and Visa Plus networks operate much as Eftpos does domestically.

Cash withdrawal fees and currency conversion fees, however, also apply to debit transactions.

Check carefully the advice given at your bank branch about overseas access to your accounts. Counter staff at one major bank recently advised that savings accounts linked to a credit card could be accessed for debit withdrawals from ATMs in Britain. This turned out to be false, with the only card option being expensive cash advances.

"Banks are unclear about the arrangements," North warns. "There is a conflict between what the people in the branch tell you and what you can actually do."

For purchases, a Visa debit card works at all the merchant outlets that accept Visa credit cards with payment debited to your savings account instead. St George, Suncorp, Bendigo Bank and a number of credit unions offer these cards.

Meanwhile, as credit card fees keep rising, travellers' cheques have gone in the opposite direction as a result of competition and could now be a cheaper option.

The advent of the Euro also makes travellers' cheques more cost-efficient, with only one denomination needed for travel through the 12 Western European countries in the Eurozone.

Assuming you can buy travellers' cheques at 1.1 per cent and your bank charges a 1.5 per cent currency conversion fee on credit card transactions, the cheques can work out cheaper. Banks may also waive fees on the cheques for people who have a home loan or other valuable business with them. Travellers' cheques can also allow you to lock in a good exchange rate.

There still remains a wide variation in charges for purchasing foreign currency travellers' cheques including high minimum fees and then charges for converting to cash at the other end.

Banks used to offer better rates than the bureaux of exchange but this is not always the case now, says North. You have to shop around. So what's the best travel finances combination?

There are three main considerations when choosing how to carry or access your spending money when travelling overseas: convenience, cost and security.

North suggests travellers take a small amount of the local foreign currency for use on arrival, the bulk of funds in travellers' cheques - denominated in the local foreign currency, not Aussie dollars - and a credit card for emergencies and purchase convenience.

The credit card wins on convenience, being more widely accepted by merchants than travellers' cheques. On security, lost or stolen cheques can often be replaced free in 24 hours, unlike cards.

"If you lose your credit card, you're stuffed," North says. To avoid liability for fraudulent transactions it must be reported to your home bank quickly, while getting a replacement is problematic and costly.

Carrying large sums of foreign cash is clearly less secure and less favourable exchange rates and purchase fees means it's more expensive too.

A survey of two major banks and two exchange bureau within 100 metres of each other on Pitt Street in Sydney saw fees on the purchase of 1000 Euro vary from $8 to $25.

Decline and fall Credit cards are becoming inconvenient in other ways too, as Gerardine Naughton of Brighton, Melbourne (pictured left), discovered on a recent overseas trip.

After having her card unexpectedly frozen while travelling overseas, she has learnt from bitter experience not to rely on her credit card.

"If you're going to South-East Asia, contact your bank and tell them in advance so that they know not to block your card," she says. Her experience shows that transaction-monitoring technology now employed by major banks as an early-warning system for fraud can backfire on the cardholder.

Because fraudulent transactions were rife in Malaysia at the time, her purchase at a jewellery store there triggered "suspicious transaction" alarm bells at her bank back home.

Despite plenty of available credit, Naughton's transaction resulted in further purchases being declined and her card being useless for the rest of the trip.

Back in Melbourne, the bank had tried to contact Naughton at home to verify whether the transaction was legitimate. Not being able to make contact because she was away, the card account remained suspended, highlighting a flaw in the anti-fraud procedure.

Naughton says because of these complications and high charges on overseas use, she and her husband are reducing their reliance on credit cards when travelling.

"Ten years ago we would just use our credit card. Now we also load up the debit card and use that for getting cash out for spending money," she says.

Last month Money columnist Anne Lampe alerted readers to the problem following a similar experience of a reader with a Westpac MasterCard. He narrowly missed being stranded on a remote island in China. He complained to the ACCC but received little satisfaction when it wrote back pointing out that in terms of the conditions of use of his card the bank has the power to "cancel your card at any time without prior notice".

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