Pick the Right Way to Pay on Vacation

You've put in the time to plan your perfect summer getaway. All the arrangements are made -- an economic hotel, well-timed pit stops, and cultural oddities to keep the kids amused.

But have you thought about the best way to pay the tab for meals, museum tickets, rental cars, and kitschy mementos? We're not talking about budgeting (though that's a good idea, too -- see these ways to cut travel costs for more). This is about considering the logistics of how you physically pay for your day-to-day necessities. You might be surprised by how much how you pay can pad your tab.

Paper or plastic?

There are many ways to pay when you're on the road -- traveler's checks, credit cards, ATMs, cash. The key factors to consider are cost, convenience, and safety.

For convenience and safety, credit is the way to go (particularly if you don't want to ruin the perfect line of your suit with a money belt stuffed with cash). Debit cards are also convenient and relatively safe to use (as long as you keep your PIN private), but it may cost you a few bucks to use an ATM that's not at one of your bank's branches. Cash is cheap, but not necessarily safe. And traveler's checks can be inconvenient and carry fees to purchase and exchange.

But before you whip out the plastic, consider this: If you're traveling overseas, brace for an unpleasant memento from your travels once your credit card bill arrives: currency conversion fees (typically 1% of your total transaction) and foreign transaction fees (which can run an additional 1% to 3%).

Cut your travel transaction costs

Before you leave home for exotic locales, call your credit card company and find out what it charges for overseas transactions. For example, American Express doesn't charge a foreign transaction fee but it does carry a 2% currency conversion fee. Capital One eats the cost of both, as does Discover (though the card is not as widely accepted overseas as Visa and MasterCard).

A prepaid debit card can help you avoid some of these fees, but relying solely on this mode may leave you in a pinch as not all vendors are set up to accept them.

No matter where your travels take you, if you are using an ATM, you can limit the number of times you pay the out-of-network fee by withdrawing a lot of cash at once -- though carrying a wad of cash puts you at risk for theft. If you carry American dollars or traveler's checks overseas, you might not get as good of an exchange rate as you do via your credit card.

The best strategy is to have a few payment options at your disposal at all times. If you find a bank that offers a great exchange rate and low fees on traveler's checks, consider using them to pay for big purchases (such as your hotel bill). On smaller day-to-day purchases, withdraw a few days' worth of funds at once to cover costs and put the extra money in your hotel safe.

Don't get stuck doing dishes to pay for dinner

Alert your bank and credit card company before you travel -- domestically or overseas. Banks and credit card companies are on high alert to fraud and sometimes they have a hair-trigger reaction to unusual account activity. After an initial withdrawal at an ATM at the Paris airport, my bank cut me off because I didn't let them know that I was taking a well-deserved break overseas. Thankfully, a quick phone call remedied my Parisian payment problem.

And just to be safe, if you're separated from your bags or lose your purse or wallet, keep copies of everything in your wallet -- insurance cards, driver's license, credit/bank cards, passport, and contact information -- on you and in your luggage so you don't have to bus tables to pay for your crepes.

Dayana Yochim test-drives travel mishaps so that you don't have to. She's lost her wallet before boarding a plane to Italy, had her ATM access cut off at Charles DeGaulle Airport, and talked her way out of several cancellation fees. She shares her hands-on approach to finances every day at www.GreenLight.Fool.com.