Many of us use credit cards. Are you aware that you can use your credit card to make cash withdrawal from ATMs too? However, even though cash withdrawal from ATM is permitted, it does not mean you have to withdraw cash using your credit card. Cash withdrawal using your credit card may not be a good idea.
When You May Have to Withdraw Cash Using Your Credit Card?
This is a valid question. Why withdraw cash when you can swipe your card? Well, there are a few scenarios that I can think of. Under most cases, you will use this option only when you don’t have enough balance in your bank account.
- Credit card is not accepted where you want to make the payment. And you still need to make the payment. (For example, to pay rent on your house).
- Urgent Cash payment when you don’t have money in your account
- You need to give money to a relative/friend.
I am sure there can be many more. Now, Let’s look at why cash withdrawal using credit card is not advisable.
1. There Is No Interest Free Credit Period
When you use your credit card to make a purchase, you get interest-free credit period for up to 52 days. There is no such interest free credit period if you use your credit card to withdraw cash. You have to pay interest from day 1 on cash withdrawal. Interest is charged from the date of withdrawal transaction to the date of settlement of dues. The rate of interest is same as those charged for your other purchases. The rate will range from 3-3.5% per month.
Yes, credit card debt is the most expensive debt in the formal finance sector. Hence, do not wait till the statement date or due date to pay your bill. If you have made a cash withdrawal, pay your bill at the earliest. In fact, you do not have to wait till such time you have enough money to pay the balance in full. Use any surplus in bank account to settle part dues. For instance, if you withdrew Rs 50,000 using your card and have Rs 20,000 (surplus) in your bank account a couple of days later, use the amount to settle part bill. You will save a significant amount on interest cost.
2. There Is Upfront Charge for Cash Withdrawal
You can think of Cash Advance fee as a transaction charge. Even if you transfer the money to your credit card account after 5 minutes, you still need to pay cash advance fee. Fee for cash withdrawal will vary across credit cards.
Under American Express Gold Card, you have to pay Cash Advance Fee of 3.5% of the withdrawal amount per transaction subject to a minimum of Rs 250. Even if you make a withdrawal of Rs 10,000 using your credit card, you will have to incur cost of Rs 350 + Service Tax.
Under Citibank Rewards Card, you have to pay cash advance fee of 2.5% of the withdrawal amount subject to a minimum of Rs 500. Hence, even if you withdraw Rs 2,000, you have to pay Rs 500 as the cash advance fee.
3. There Is No Ancillary Benefit Such as Discount, Cash Back or Rewards
I have availed discounts/cash back for using credit card to make purchases online or at brick and mortar stores. This is a very neat saving as you wouldn’t have got the discount/cash back if you had used net banking or debit card to make the payment. You can very well transfer the money to your credit card account 5 minutes later after availing the deal. I have never really found reward points too appealing but even reward points is a benefit for which you do not have to pay anything.
In case of cash withdrawals, there is no ancillary benefit. There is only ancillary cost in form of cash advance fee.
There Is a Cap on Your Cash Withdrawal Limit
Though this is not really a deterrent, this is an aspect you must be aware of. Your cash withdrawal limit is not the same as your credit limit. Typically, it is much lower than your credit limit. The limit will vary across credit cards. Under a few cards, the limit may be absolute while with others it could be a percentage of the credit limit. For instance, American Express Gold Card has cash withdrawal limit of Rs 10,000 per month. Under HDFC Platinum Edge card, cash withdrawal limit is 40% of the credit limit.
What Should You Do?
- Avoid cash withdrawal using your credit card as much as possible.
- Use your debit card for cash withdrawal (instead of your credit card). I know you will not use credit card for cash withdrawal if you had enough bank balance.
- If possible, swipe your credit card instead of using it to withdraw cash.
- Use cash withdrawal using credit card as the last resort.
- If you have withdrawn cash using your credit card, do not wait for the statement date and the last payment before you settle your bill. Pay as early as you can. Pay as much as you can. Remember there is NO interest free credit period in case of cash withdrawals.
Even though I advocate swiping your card instead of using it to withdraw cash, you must not swipe your credit card indiscriminately. Rule no. 1 of debt management is that you must not borrow more than you can repay. Aside from interest-free credit period and cash advance fee, card swipe and card withdrawal are same. Both are your borrowings. Keep your borrowing under limit and always pay your credit card bill on time. Under a few cases, you may have to make a cash withdrawal to withstand social pressure, say lend money to friend/relative. Do not give into the social pressure. Candid conversation can avoid much financial worries later.