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An investigation into overseas charges on debit cards has found that the banks are taking holidaymakers for a ride when they pay for things overseas and opt to pay in their home currency.

Even though the payment is made in pounds sterling, and therefore is no more complex or expensive for the banks than a UK transaction, many are imposing extra charges. So just how bad are the charges, and how can you beat the banks?

Poor exchange

Which? was investigating transactions made using something known as dynamic currency conversion (DCC). It is offered as an option when you buy something on your debit card abroad - or withdraw cash from an ATM. It lets you pay in pounds sterling rather than in the local currency, which has the advantage that you know the cost of your purchase at the time you make it, rather than having to wait for your statement.

The fundamental problem with the system is that the exchange rate is set by the shop or restaurant itself (or the ATM operator), rather than your bank, which means it is often at a much worse rate than the bank would have imposed.

A Which? survey of those using the system found a high degree of dissatisfaction. Some 61% of those who had used it felt that it offered poor value. Meanwhile, one in five said they had now had the process explained properly before they took advantage of it.

Which? credit card expert Bobby Nicholls says: 'DCC is probably best avoided, unless you know it is offering you a better rate than your bank is offering. "

Added charges

If it wasn't bad enough that DCC itself is leaving us feeling ripped off, it appears that some of the banks are adding insult to injury and applying charges of their own too.

Even though the transaction is in pounds, some are applying their overseas debit transaction fees. They don't apply the foreign loading fee - which tends to be around 2.75% to 2.99%. The fee you have to watch for is the overseas debit transaction fee.

The banks

NatWest will apply this fee to both purchases and ATM withdrawals made overseas using DCC. Meanwhile, HSBC, First Direct, Lloyds TSB, Barclays and the Co-operative charge overseas ATM withdrawal fees.

Santander, Halifax and Bank of Scotland waive fees on overseas purchase and ATM withdrawal, while Nationwide waives withdrawal fees.

Should you use it?

It means that even if the exchange rate you are being offered seems competitive (and of course you'll need to check what your bank is offering before you travel if you want to make a proper comparison), you also need to add in the card charges before you make a decision on whether it's worth it.

This level of maths is usually something we steer well clear of - especially when we're on holiday and paying for the second round of drinks.

However, the experts recommend that at the very least we should be familiar with our provider's charging structure, so we know what charges apply when we spend money in the local currency, and what charges are imposed when we spend using DCC. That should give us some idea of whether it's worth even asking what the retailer's DCC rate is, or whether we ought to be giving it a wide berth in every situation.

But what do you think? Have you ever used DCC? Were you impressed? Let us know in the comments.