Ask the Scotsman: How to put the dynamic into DCC retailing

Q: IN A shop in Spain recently I was asked at the till if I wanted to pay in euros or pounds. I could vaguely remember that one option might end up costing more than the other but couldn't recall which so I just went for euros.

What was the right answer, and why?

Celia, Edinburgh

A: There isn't really a "right answer", but paying in the local currency could expose you to huge variables in cost.

The choice is based on a system called dynamic currency conversion (DCC). It is an optional service provided by individual retailers or ATMs when you use your credit or debit card abroad, giving you the opportunity to pay in either the local currency or pounds sterling.

The service is becoming increasingly common in Europe.

If you opt to pay in pounds, the shop will convert your payment from the local currency into sterling – but it will do so at its chosen exchange rate rather than the one that would have been used by your bank or card provider. Typically, retailer-driven exchange rates can leave you 4 per cent out of pocket compared to the exchange rates set by banks or card providers.

Unless you carry a calculator with you everywhere it's almost impossible to know which is the better deal unless you can find out the rate from the retailer or shop assistant – often difficult in another language.

The uncertainty means it is nearly always best to opt for the local currency. Although most UK banks incorporate a foreign currency conversion charge of around 2.75 per cent on your purchases, the foreign exchange rates offered by shops or ATMs abroad are usually much worse than those set by your own bank.

Financial websites often recommend the Nationwide credit card because it doesn't apply extra fees to transactions abroad – and it also applies positive payment hierarchy, which means you can spend knowing your most expensive debts will be paid off first.

Although foreign transactions are far from transparent, there is no reason why you should pay unnecessary fees.

If you really want to do your research, make a rough note of your bank's exchange rates and fees before you go away, and compare them with the rates given by the retailer which should be listed on the receipt or ATM screen.

DCC is not by default a rip-off, but be aware the pitfalls of going for the easy option.

Choose a credit card or bank account without foreign transaction fees and think twice before agreeing to anything when paying at the till.

UK card holders were charged almost £5 million in July alone by retailers overseas to convert their transactions into sterling. The retailer benefits most from offering this method.

Nationwide is concerned that there is a general lack of awareness about DCC and that foreign retailers are not complying with the rules by applying the conversion service automatically without the cardholder's consent even when cardholders have insisted on paying in pounds at the point of sale.