Cash, credit, or debit: Which is safest when traveling?

Travelers checks have long been out of fashion, so what's the smartest way to spend money on vacation? 

A vacation should be all about the relaxing, but far too often money concerns get in the way. When I started traveling back in the 1990s, it was considered fool-hardy to go anywhere without safely converting your money into travelers checks first.

But, like the Walkman and Full House, travelers checks went out of fashion, replaced with a variety of credit cards and prepaid cards. (Unlike the Walkman and Full House, travelers checks have not been the subject of a recent semi-ironic revival.)

But what about hidden costs and safety? We've investigated the smartest ways to spend your money while on vacation.

When to Carry Cash

Having a few notes on your person is a comfort when traveling and can really come in handy, especially if you're traveling to a less-developed country where you're unlikely to find a card machine in every kiosk. We recommend carrying a minimal amount of cash when traveling and splitting it up just in case. A small stash in your money belt or sock can be a life saver.

Foreign Exchange Rates

A major concern when traveling abroad is not getting stung by the exchange rate. A seasoned traveler will advise you to wait until you get to your destination and use an ATM to withdraw money as the withdrawal rates are usually more favorable. Avoid currency exchange kiosks, they usually charge exorbitant fees.

Alternatively, foreign post offices sometimes offer commission-free currency exchange. For example, the Irish post office system (An Post) offers commission-free conversion of Euro to Sterling.

Prepaid Cards Preloaded with Currency

Prepaid travel cards were the main downfall of travelers checks, and are a simple and common solution to keeping your money safe yet accessible when you travel. These cards function as a debit card and are accepted almost anywhere with a Mastercard or Visa symbol (see below for more).

The great advantage to these cards is that the rate of exchange is fixed on the day you load it. So if you wait for a day when the exchange rate is favorable, you won't be penalized later if the exchange rates were to rise. Of course the converse is true, so it's important to pick your moment. Another bonus is that these cards often don't charge fees or interest for cash withdrawals, so you can take money out as you need it, rather than carry around big wads of cash.

While prepaid cards are a solid solution, they do come with some caveats. The biggest one being that most car rental companies do not accept them, instead requiring a credit card to cover your rental. It's also important to check the terms and conditions of the card before you purchase. Most cards make their money by catching you out with hidden charges like "inactivity fees," but if you inform yourself you should be able to avoid them.

Credit Cards Offer the Best Security

Credit cards offer the most security in general, including while traveling. Unlike debit cards, credit cards aren't linked to your checking or savings account, so there is no risk of a fraudster accessing your funds. Neither debit nor credit cards hold users accountable for fraudulent charges, but fraud is still easier to deal with when money hasn't actually been deducted from your checking account.

Unlike debit cards, credit cards aren't linked to your checking or savings account, so there is no risk of a fraudster accessing your funds.

Not all credit cards are the same either. Helen Saxon, Chief Product Analyst at MSE.com found that "Mastercard plastic, barring a few anomalies, gives you a better rate than Visa cards for comparable spending." So all things considered, stick with Mastercard for your larger transactions to maximize your vacation funds.

The only area where credit cards fall down is on cash withdrawals. Most credit cards charge high transaction fees and interest compared to prepaid cards. For this reason, it's best to keep your credit card for larger charges like car rental and hotel bills, and use a prepaid card for day-to-day walking around money.

Use All Options for Best Results

In summary, use a three-pronged attack on your vacation spending. Carry a small amount of cash with you, and use a prepaid card for the majority of your expenses to take advantage of favorable exchange rates. Put any major expenses on your credit card to make sure they're safe.

Our final tip is to advise your bank that you're going on holiday, so you don't get cut off when they see a bill of $100 in the Bahamas!

This article first appeared in DealNews.