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Which credit cards are the best to take on holiday?

If there is one flexible friend you can rely on to keep you company on holiday it is your credit card. Whether you are paying for a round of cocktails in a Tahitian bar or a wicker donkey in a Spanish shop, your plastic is fantastic. Or is it? It may be hard to beat for pure convenience but the 'hidden' costs of using your credit card abroad can deliver a nasty surprise when you return home. Here's how to get more from your credit card on holiday.

Before you travel

Start by checking your payments are up to date and you have enough credit available. You need to be able to rely on your card being accepted, especially for emergencies, and this will also avoid any late payment fees.

Assess what perks are on offer. You may get free travel insurance cover with your credit card but you need to read the small print to be sure it is sufficient. In countries such as the US you will need substantial medical cover and if you are planning on skiing or enjoying water sports then the free policy is unlikely to include these. On the plus side, your card issuer may reward you with Air Miles or offer discounts on brochure prices if you book through their travel service. Since these discounts can cut 10% or more off the brochure price, substantial savings can be made. Other discounts include money off hotel and car hire charges. Your card issuers will be able to give you detailed information.

Write down the international 24-hour numbers for reporting lost or stolen cards to your issuers. Keep the details, along with your card numbers in a safe place separate from your credit cards.

Don't assume that remote destinations will accept plastic - check in advance if you can.

If you expect to use you card a lot whether home or away and you always pay your bill in full then a card offering cashback will reward you for shopping. For every pound you spend, the card issuer will give you back a percentage after 12 months. Every time you buy something you get a small percentage of the price credited back to your account. It's like getting a discount every time you go shopping and used properly, it makes spending on your credit card cheaper than using a debit card or even cash. But you need to be disciplined. If you pay your bill late or carry some credit even for one month then you may find that the value of the cashback is far outweighed by the cost of interest.

While you're away

When you use your credit card abroad you have to pay a 'loading' or 'conversion' fee. This is usually 2.75% of the value of the transaction and is applied each time you use your card. That means if you spend £1,000 on holiday, you'll pay an extra £27.50 in charges.

In 2004 British holidaymakers made 64m trips abroad, spending up to £30 billion, meaning that consumers are paying millions of pounds in transaction charges that many people will be unaware of. The research by product information group Defaqto highlighted Nationwide Building Society and Lombard Direct as the two issuers who did not charge for foreign purchases. The group also found that the SAGA credit card didn't charge for purchases made within the EU, but charged 1% on those made outside it, while the Liverpool Victoria credit card also didn't charge on transactions made within the EU, but only existing customers were entitled to the card.

Cash withdrawals also incur a handling fee or service charge, which tends to be a percentage of the amount taken out and is usually around 1.5% for each transaction, although some banks charge a flat fee as well as or instead of this. On top of these charges, you should be aware that with very few exceptions, providers charge a higher interest rate to withdraw cash than they do for retail purchases, and most cards charge interest as soon as the cash is withdrawn. Buying foreign currency with your credit card is treated as a cash withdrawal so similar charges will apply and you will get no interest-free period. By organising sufficient currency or travellers cheques before you travel, you could avoid the need to max your credit card at the ATM.

Keep you cards safe

Fraud costs the British card industry millions of pounds every year and thieves like to target relaxed holidaymakers. The introduction of chip and PIN technology should help to reduce crime but there are several things you can do to ensure that your cards stay safe overseas:

If possible leave your cards in a hotel safe when you do not need them. When you have your cards with you, keep them in an inside pocket or money belt.

When signing a card receipt make sure the ‘total' box is filled in correctly, draw a line through any spaces in the box, check noughts, commas and decimal points before signing and try not to let the card out of your sight.

If you are paying for goods in a foreign currency, make sure you understand the exchange rate - one or two extra zeros could make a big difference to your bill.

Keep your copy of the transaction slip along with your receipt to check against your bill when you get home.