Should I choose local currency or pounds when paying by card abroad?

I recently landed in Spain for a three-week holiday and my bank is offering me commission-free spending abroad.

However, when I paid for a family meal last night which cost around €150, the card machine asked me if I wanted to pay in local currency or in pounds.

I always forget which is the best option. Can you enlighten me?

What if you choose the wrong option? Is there really that much difference?

Helen Kirrane from This is Money responds: It’s the same old question. When you’re on holiday, you’re given a card machine and asked if you want to pay in pounds or the local currency.

Depending on which of these you choose, the costs can be very different.

You may be tempted to choose to pay in pounds thinking that your own bank or card provider would offer you a more favourable exchange rate.

However, there is a definitive answer to this conundrum: you should always choose the local currency of the country you are visiting if given the option.

It will almost always be cheaper than choosing to pay in pounds.

When you choose to pay in the currency of the country you are visiting, Visa or Mastercard will set the exchange rate.

The exchange rate used by your card provider when paying in local currency will almost always be better than the exchange rate used by the foreign shop or bank when paying in pounds sterling.

If a card machine offers you the option to pay in pounds, always decline this and choose euros or the local currency of the country you are in.

If you choose the wrong currency and decide to pay in pounds, it will end up costing you more.

This is because you are at the mercy of the foreign bank or retailer’s exchange rate, which will be much less favourable than that of your own card provider, and that means you will pay more than you should.

This is known as dynamic currency conversion (DCC) and also applies to cash withdrawals from a foreign ATM as well as card payments, so choose the local currency here as well.

This is a huge hidden cost for Brits paying by card abroad.

DCC allows a provider to use their own exchange rate to convert the amount of local currency they wish to withdraw into British Pounds. However, the cost of the exchange will always be at their expense.

A Correos spokesperson responded: You can find DCC in many countries around the world, but be especially careful if you use ATMs in Spain, Greece, Portugal, Croatia or Thailand.

If you use an ATM or spend with your card abroad, always choose to withdraw or spend in the local currency.