They have been billed as the successor to the traveller’s cheque (didn’t everyone stop using those years ago?). Pre-pay cards, which can be loaded with currency and then used abroad, are becoming increasingly popular for holidaymakers wary of taking credit and debit cards with them when they travel.

But are pre-pay cards really the answer to travellers’ money worries? The idea behind pre-pay is simple. You purchase a card, for a fee of about £10, on to which you can load either euros, sterling or US dollars.

On the Post Office card, for example, you must load at least £250, or the euro or dollar equivalent, and can then top up in £50 increments. Cards can be used to draw money from cash machines or to pay direct in shops or restaurants in the same way that you would use a debit card.

As yet, there is only a handful of pre-pay cards on the market. The Post Office launched its version, the Travel Money Card, this month. American Express, Travelex, Western Union and iTravel also offer pre-pay cards and card experts expect the market to grow.

Rachel Thrussell, of Moneyfacts, the price comparison service, says that the market for pre-pay cards will grow because they offer “flexibility and protection”.

Robert Kenley, head of credit cards at moneysupermarket.com, the price comparison website, adds: “The concept of a pre-pay card has yet to take off on a large scale in the UK, but we expect more issuers to develop them.”

In the meantime, Mr Kenley says, holidaymakers need to watch out for charges levied by card issuers. “The charges can be a sting in the tail for travellers who may be better off using a credit card that is suited for use overseas,” he says.

There are a number of fees to take into account. One-off card-issue costs range from £9.95 at Western Union and iTravel to £20 at American Express. Then there are cash withdrawal charges. The cheapest card is from iTravel, which charges only 85p to withdraw cash, while Western Union and the Post Office charge £2 for each withdrawal.

Western Union also charges a fee of £3 every time you load your card, while the Post Office offers free loading for euros and dollars, but levies a 1.5 per cent charge when you load sterling.

There are also foreign transaction costs to consider with some of the cards. Western Union is the most expensive with a 4 per cent charge, and most pre-pay cards levy a redemption penalty of up to £10 if you want to cancel the card.

Despite these high charges, issuers expect the cards to be popular because they offer consumers both safety and convenience. Because the cards are not linked to a bank account and have their own personal identification numbers, they are secure and can be replaced quickly if they are lost or stolen.

However, there is one other drawback to taking a pre-pay card on holiday. If you pay for goods with a credit card, you are covered by the Consumer Credit Act if something goes wrong. This is not the case with pre-pay cards, which are effectively viewed as cash.

CASE STUDY

Paul Eden enjoys adventurous sports but he would rather not take risks with his cash. The sailing enthusiast, above, is heading to Italy this month to compete in the 2006 Laser 4000 European Championships on Lake Garda and will be taking a Post Office Travel Money Card to avoid a rerun of an incident that occurred when he was on holiday in Europe last October.

“My credit card was skimmed and the fraudsters took £500 off the card,” Mr Eden says. “I got the money back eventually, but it made me more aware of the dangers of using cards abroad. The pre-pay card seemed a reasonable alternative.”

Your spending money alternatives

Credit cards

Before you decide to flex your plastic on holiday be aware that most credit card providers charge a minimum of 2.75 per cent for each transaction. Nationwide is the only big lender that does not charge for overseas purchases. Liverpool Victoria has no fee for purchases in the EU but levies a 2.75 per cent fee everywhere else. Cahoot charges 2.25 per cent globally.





Debit cards

Using a debit card abroad is not necessarily cheaper than a credit card because most banks also charge current account customers a foreign usage fee of 2.75 per cent. Again, Nationwide does not charge debit card customers for overseas purchases.





Cash

Many banks, post offices and high street travel agents sell foreign currency, but do not be tempted by “commission-free” offers. Always compare the total amount you receive for your money before you buy.

It can be convenient to withdraw cash from foreign ATMs but Samantha Owens, head of research at Moneyfacts.co.uk, the price comparison website, says that holidaymakers need to be aware of the cost. “Apart from Nationwide, all banks charge a fee or at least



1.5 per cent or £1.50 for debit card cash withdrawals,” she says. “People using credit cards for cash advances will face withdrawal fees and foreign exchange charges. They will also start paying interest immediately.”





Traveller’s cheques

These remain one of the safest ways to carry holiday money, although they can be inconvenient to cash. American Express traveller’s cheques are the most popular. As with holiday cash, you should purchase your traveller’s cheques from the agent offering the best overall deal. Foreign banks and bureaux de change will often charge a fee for cashing the cheques.

Andrew Ellson