The convenience and benefits of a credit card are unparalleled. It has not only transformed the way people shop, but also provided a cash-withdrawal cushion during emergencies. Since it does not require any extra documentation, withdrawing cash from ATM’s by a credit card is quite simple anywhere in India or abroad. However, one needs to exercise restraint while using a credit card for cash withdrawals as varied charges are applicable on it. So it is important to know about the charges that are levied.
How A Credit Card Use Is Billed
All credit cards have billing cycles: for example, from the 15th of one month to the 14th of the next. After the end of the cycle, you’re provided a usage statement which summarizes your card transactions for that cycle along with charges, penalties or outstanding as applicable. The dues need to be settled by the due date mentioned in the statement. You can pay either the entire amount or pay the minimum dues, which are typically 5% of the total due. The due date falls a few days or weeks after the end of a billing cycle. In case you fail to pay the dues by the deadline, an interest is levied on the outstanding amount. If you fail to pay the minimum dues, then a penalty may be charged as well.
How Credit Card Cash Withdrawals Are Charged
In the case of a regular credit card use such as an online transaction or a POS swipe, interest is charged only on the outstanding amount after the due date. Let’s say you bought groceries worth Rs. 2000 in the current cycle and paid Rs. 1500 by the due date, the interest will apply only on Rs. 500. If you paid the full amount by the due date, which may be several weeks after the transaction, you pay no interest. But in the case of cash withdrawals with your credit card, interest is levied from Day 1 of the withdrawal. There is no interest-free period. Besides, there are other charges too so keep them in mind while using a credit card for cash withdrawals:
Cash Withdrawal Charge
Also known as cash advance or cash withdrawal fee, this is charged each time cash is withdrawn using a credit card. The cash withdrawal charge typically ranges from 2.5% to 3% of the withdrawn amount. Sometimes, this charge may be capped; for example, between Rs. 250 to Rs. 500 on cards provided by a leading bank.
Cash Finance Charges
This is similar to credit card transaction charges. You are charged a fee on the finance charge at a rate similar to charges on the withdraw amount. The duration for this charge is from the date of withdrawal to the date the amount is paid back completely.
The interest rate is levied from the date cash is withdrawn to the date it is paid back fully. It varies from bank to bank but usually ranges between 2.5% to 3.5% on all cash advances.
Mistakes You Should Avoid
While it is convenient to use credit card for cash withdrawals, it is wise to be aware of some common mistakes that can have serious ramifications on your financial health.
– Cash withdrawal alone through your credit card will not impact your credit score. But like any other loan payment, if you commit the mistake of not paying back the withdrawn amount or not paying the minimum dues, your credit score will be impacted negatively. Ensure you make regular and timely repayments.
– Late payments can be made, subject to terms and conditions, but the credit card company will levy late payment charges on your outstanding balance as described in your card agreement. It makes sense for to understand the associated terms and conditions of your credit card before using it for cash withdrawals.
– Make yourself well aware about how you earn reward points while using a credit card. Cash withdrawals never help you in earning any rewards; you only earn them through select merchants or transactions, on online channels, or as allowed by the card company. The rewards can be discounts, gifts, cashback etc. So, do not fall prey to the thought that cash withdrawals may help you in earning rewards.
Credit cards may provide you instant cash during emergencies. However, you should take this option only in an actual emergency where you do not have any other option. There is no interest-free period for cash withdrawals and your dues will continue to pile up till you clear them completely. For cash withdrawal, ATM cards are the best.
The writer is CEO, BankBazaar.com