I will be traveling to Italy for the first time in September. What is the most cost effective and convenient way to handle payments? Which credit cards are best to use? How about ATMs?

Use CC when you can.
Visa or MC is best---not AMEX
Get your cash from ATMs [ Bancomat}

Cost-effective: Cash. It will be depend on your home bank, but many North Americam banks charge $2-$5 service charge on a foreign transaction. Check with your bank or read the fine print on your agreement. That charge is on top of the foreign exchange rate, which always favours the bank. The bank sells you foreign currency for more than the "wholesale" rate and buys the money bank at less than that rate. They make a profit each way; you lose both ways.
So to use a credit card in Italy for small purchases could impose up to a $5 foreign transaction fee from your own bank (like mine). It is far cheaper to pay that flat fee once to withdraw a large sum from an ATM. Then pay cash for routine transactions. I use my credit card only for large payments such as a hotel bill. Forget about purchases through a debit card; it's too complicated
The archives on this forum have many discussions of the issue. Remember to notify your credit and debit/ATM card issuers of your itinerary before you leave.

I hate banks, so "cost effective" to me always means NO FEES.

For smaller-priced items at mom-n-pop businesses, cash often offers perks, especially with food.

For higher priced items, Visa is most widely accepted, but it's getting more difficult to find no-foreign-transaction-fee cards.

I would only use a no-fee Debit Card to get cash from an ATM. If you have a good relationship with your bank, some banks will increase the daily withdrawal amount, and that might save you a little money. But you're always subject to withdrawal maximums offered by the Italian ATM that you use.

>>> Check with your bank or read the fine print on your agreement. That charge is on top of the foreign exchange rate, which always favours the bank. The bank sells you foreign currency for more than the "wholesale" rate and buys the money bank at less than that rate. They make a profit each way; you lose both ways.<<<

Not all banks charge those fees. Check your credit union if you are in one. I pay the interbank rate listed on the exchange websites, not a mark up by using my credit union ATM card.

I too am planning my first trip to Italy. Bookmarking this thread as a reference.

Most cost effective - unless you can find a bank that will let you charge on cc or withdraw cash at ATMs without a fee and % on top of Interbank - is to use CCs (Visa or MC is taken almost anywhere for more then $25 or so; AmEx is not taken in some more modest places) to pay for all larger charges (car, hotel , meals) and pull walking around money from your checking account at bank ATMs.

This will cost you from 1 to 3% above Interbank rate - versus 8 to 10% about it for changing money in the US or cash in europe.

You need both the ATM/debit cards and credit cards.

It is not always up to you to decide whether to use cc or cash. Small shops, restaurants, and sometimes museums only take cash. Also, while many say use CC for hotels, cheaper accommodations might only take cash. Research your itinerary instead of relying on others who happened to have stayed at places taking CC. Family owned small inns often give cash discounts. If you are staying at an apartment, they too often want the payment in cash. Don't assume, verify.

Use bebit/ATM card only at atm to get cash. Do not accept any offers to debit your bank account in home currency. Always choose EURO. Their conversion will cost you several % on to of what back charges. They define foreign transaction as any taking place abroad, including dollar, etc.

Similarly, reject any offer get CC done in dillar, etc. This us called DCC and grossly favors the bank who pockets 6% or so without providing you with any service at your expense.

Pull cash from an ATM. Pay with cash everywhere. Cash is well appreciated

A credit card, or at least a piece of plastic with a Visa logo, is handy for vending machines like rail tickets.

Citibank give a decent exchange rate, and do not charge ATM fees. (Citibank Australia that is )

We just returned from Belgium and The Netherlands, and especially in the Netherlands it was difficult to use an American credit card in many shops and restaurants because they do not have chips. Has this happened in Italy as well?

In some cases they had a special credit card machine and others cash was the alternative.

<i><font color=#555555>"Pay with cash everywhere. Cash is well appreciated."</font></i>

While this may be true, it can also be impractical and imprudent. Many of us veteran travelers know the perks and advantages that come with frequent flyer mile accrual. Most of my Business Class airline upgrades come from miles, and believe me, traveling in Business is far superior to Coach. So, if your credit is good and you know how to work the frequent-flyer programs, using a credit card on expensive purchases can work to <b>your</b> benefit.

Time for some specifics.

First, get a Capital One or credit union account for your travels. Use their ATM cards. Cap One cards do not charge foreign exchange fees or charge 1%, same for most credit unions (go check the specific one for which you may qualify). The forex fees of other major credit cards are usually between 1-3% above the "interbank" rate, which is the foreign exchange rate you see in the newspaper, on xe.com, on oanda.com, etc. Know your withdrawal charges too - if your home bank charges $5 per withdrawal at another's atm, then you're paying $5+ the forex %. My chase card charges $3 + 3.5% . . . and that's why I don't use it.

Second, get a credit card with low forex fees. Again, CapOne cards work here, so do various Citibank cards. There's a wiki for this somewhere in the interwebs.

Third, NEVER WITHDRAW CASH WITH A CREDIT CARD - your interest accrues and is charged from the date of withdrawal (no 25-day grace period like you have with purchases).

Fourth, do NOT change cash at a cash exchanger. They may say "no fee" but they're not running a bloody charity. They make money on the margins between the interbank rate and what they charge you - e.g., a $1.38/1E interbank exchange will cost you $1.48/1E or more at an exchanger.

Fifth, if you are offered the opportunity to pay in dollars in a foreign country, DO NOT DO IT. Pay in the native wampum only. This is a service called "Dynamic Currency Conversion." It provides a comfort level for travelers to pay in the currency they understand the best (their own) but it is a ripoff - usually 5%+ over the interbank rate, which is worse than your credit card charge. An example from The English Shaving Company's website - offering a certain product with three currency choices, pounds, euros and dollars. The price is 12 GBP, 10 GBP without VAT and $23+/$19+ in dollars for the same product. The dollar price is 15% higher than just paying in pounds. Major retailers will provide this option. Opt out.