Abroad and asked "pay in pounds or local currency?" Here is the answer

You tap your card in a restaurant in Spain and the machine asks: pay in euros, or in pounds? Pounds feels safer, because you know exactly what you're paying. But in most cases it is the more expensive choice.

What is going on?

The offer to pay in your home currency is called dynamic currency conversion. Instead of your own bank converting the payment, the shop's payment provider converts it at the till, using an exchange rate it sets itself. That rate usually includes a mark-up, and sometimes an extra fee on top.

If you choose the local currency, your own card provider does the conversion, usually at a rate much closer to the real exchange rate.

The simple rule

When a card machine or cash machine abroad asks, choose the local currency. Euros in the eurozone, dollars in the US, and so on. The same applies when you withdraw cash: if the cash machine offers to "guarantee" the rate in pounds, decline it.

There are exceptions. A few people prefer certainty and are happy to pay a little more for it. But if your aim is to pay less, local currency is almost always the better choice.

Your own card's fees still matter

Choosing local currency avoids the shop's conversion, but your bank may still charge its own fees for spending abroad, such as a foreign transaction fee or a charge on cash withdrawals. Before you travel:

• Check your card's overseas fees. They are listed in your account's terms or app.
• Consider a card designed for travel. Several banks and providers offer cards with no fee for spending abroad.
• Watch cash machine charges. Some cash machine operators abroad add their own fee, shown on screen before you confirm.
• Tell your bank you're travelling if it asks you to, so your card isn't blocked.

Other ways to keep holiday costs down

• Avoid changing large amounts of cash at the airport, where rates are often poor.
• Check hotel bills before you sign: the currency question can appear there too.
• Book the big costs, such as flights, hotels and car hire, in advance when there's a sale on.

The bottom line

Pay in the local currency, check your card's overseas fees before you go, and you'll avoid one of the most common hidden holiday costs. This is general information, not financial advice. Planning a short trip? See our city break deals.