Money Saving TipType: Advice
Expiry: Ongoing
We explain why withdrawing cash on your credit card will cost you a lot more than you bargained for.
What’s the deal?
If the media is to be believed, more of us than ever before are withdrawing cash on our credit cards to cover everything from day-to-day spending to mortgage, loan and even credit card repayments. However, less well publicised is the cost of this 'handy' borrowing facility.
Little do most of us realise that by withdrawing cash on credit we are, at best, being charged an exorbitant amount for the convenience and, at worse, exacerbating our debts exponentially.
We explain why this seemingly simple way of borrowing extra cash should be avoided at all costs.
What’s the cost?
Although it may seem like a convenient way to borrow, withdrawing cash on your credit card is a minefield; largely for the following reasons:
- The rate - The interest rates charged on cash withdrawals tend to be far higher than those applied to regular credit card purchases. Typically falling between 25% and 30% APR the exact rate will depend on your card provider although some charge up to 50% for this privilege.
- The fees - Almost all credit card providers will charge a fee each time you withdraw cash on your credit card. This tends to be a percentage of the amount you have withdrawn (usually around 3%) however most providers also specify a minimum fee (usually £2 - £3) that you will need to pay regardless of the amount borrowed.
- The repayments - The vast majority of providers will structure your credit card repayments so that your cheapest debts - those attracting the lowest rate of interest - are paid off first (Nationwide and Saga are among the exceptions). As cash advances are likely to be most expensive debt on your card this means that they will sit accruing interest until the rest of your outstanding balance is paid off.
- The interest free period - The 50-or-so day interest free period that is offered by most providers on regular purchases is not usually extended to cash advances. In short, this means that when you withdraw cash interest will begin to accumulate on the balance straight away.
Together this makes cash advances an incredibly costly way to borrow over both the short and long term.
What’s the alternative?
The most obvious advice is to steer clear of cash advances altogether, if you can afford to pay for something in cash then it’s a good idea to do so. However, in certain circumstances this just isn’t an option so here are some practical alternatives:
A low rate purchase card – Using a low rate purchase card for spending is a much better alternative than a cash advance. In most cases the interest charge will be far less and you will also get the benefit of an interest-free period in which to clear the balance.
An overdraft – If your current account has an overdraft facility, making use of this as an alternative to a cash advance can be a good ideal as most charge less (usually under 19.9% APR) on borrowing. A number of current accounts offer interest free overdrafts and these can be a good option to consider if you regularly need to borrow a little extra. However, if you are considering topping up your finances in this way it is important that you have a sufficient overdraft limit to meet your withdrawal needs. If you think you may exceed your limit it’s essential to contact your current account provider and request a temporary extension before you make the withdrawal otherwise you'll end up paying much higher levels of interest.
A money transfer – Some credit card providers offer a money transfer facility whereby, as part of an introductory balance transfer offer, they will allow you to transfer cash from your credit card to your current account interest free (subject to a handling fee of approx 3%). MBNA and Virgin cards are among those that offer this opportunity. If you are considering this as an option it is essential that you familiarise yourself with the terms and conditions of the deal and compare the cost of this channel of borrowing in the short term with other alternatives to ensure that it is a viable choice for you.
An unsecured loan - If you're continually needing extra cash or know that you are going to need to borrow the money for an extended period (i.e. a year or more) then it's always worth considering a personal loan as this could prove to be a more economical option in the long run.
The exception - If you are considering taking out a cash advance to meet a payment, whether this be a utilities bill, a loan or mortgage repayment or something else, the most important thing for you to do is to get some advice. The Citizens Advice Bureau, National Debtline and CCCS will be able to help you assess your financial situation and on this basis recommend the best course of action for you.
What about in an emergency?
If you really have no alternative but to borrow cash on your credit card then this is the best way to do it:
- Use a card that carries no existing balances – this will help to ensure that your cash advance won’t get stuck at the back of your balance repayment queue.
- Use the card that charges the lowest rate of interest and fees on cash withdrawals (this will be detailed on the reverse of your credit card statement).
- Withdraw the whole amount you need in one go – as almost all credit card providers charge a fee for cash withdrawals (usually subject to a specified minimum) this ensures that you only end up paying out for this cost once.
- Pay off the outstanding in full as soon as you able – this way you won’t wrack up more interest than you need to.
Compare Credit Cards via money.co.uk
