We have largely shifted towards the cashless mode of payments with the rising popularity of UPI, debit cards and credit cards. However, there are certain instances when cash is still required. To withdraw money using your debit card, you must have the required balance in your savings or current account. However, if you do not have sufficient balance in your account, you can also use your credit card to withdraw cash in case of emergency. But is it advisable? Will there be additional charges if you withdraw cash from an ATM using your credit card?
Let us begin with how a credit card cash withdrawal works.
Credit card cash withdrawal, also known as Cash Advance, works in the same way as debit cards, but instead of withdrawing money from your savings or current account, credit cards withdraw cash from your cash limit, which is a part of your assigned credit limit. However, since this cash amount withdrawn is also a form of credit, it carries some additional charges and entails certain terms and conditions.
There are two main charges associated with credit card cash withdrawals –
- Cash Withdrawal or Cash Advance Fee, and
- Finance Charges or Interest Rates. Since, interest on credit cards are quite high, charges on a credit card cash withdrawal can amount to a significant value.
Cash Withdrawal Fee
Every time you withdraw cash, you have to pay a one-time cash withdrawal or cash advance fee, which is reflected in your credit statement at the end of your billing cycle. This fee is generally a percentage of the withdrawn amount, subject to a fixed minimum amount, as set by the respective credit card provider. For example, a card might charge 5% of withdrawn amount or Rs. 500, whichever is higher.
Many people do not know this and continue using credit cards to withdraw small sums of money to cover day-to-day expenses. Since this fee is applicable on each withdrawal, you can end up paying a significant amount if you continue using the facility often. So, in the above example, if you withdraw Rs. 50,000, you will have to pay Rs. 2,500 at the rate of 5%. However, if you withdraw Rs. 2,000, a fee of Rs. 500 will be applicable instead of Rs. 100 (as 5% of 2,000).
Finance Charges
Generally, credit card purchases come with an interest-free period of 20 to 50 days until the due date. However, no such grace period is offered on cash advances for most credit cards. Instead, interest charges, which can range around 2% to 3.9% per month, are applicable on the withdrawn amount from the date of withdrawal. Some banks may also charge a higher percentage on cash withdrawal than that on revolving credit.
Furthermore, any credit card spends you make after the cash withdrawal also incur the same interest charges from the day of purchase without any interest-free period. Since the cash advance as well as new card transactions continue to accrue interest until you repay the total due amount, you run the risk of getting debt trapped due to the charges that keep increasing.
Hence, it is important to be mindful of the applicable charges as they often go unnoticed until it is too late. Moreover, if you are not able to pay the dues in full and only pay the minimum amount due, then you end up accumulating more interest, which can create a debt spiral, which could be difficult to get out of.
In addition to these charges and penalties, cash withdrawals entail some more terms and conditions, which could come as an obstacle in maximizing the card’s value.
No Rewards Accrual
Credit cards often come with benefits like reward points or cashback on every spend you make which can further be redeemed against statement credit, vouchers, airmiles or products available in the rewards catalogue. However, in most cases, cash withdrawals made using credit cards are not eligible for these benefits irrespective of the withdrawn amount. So, you not only accrue high additional charges on cash advances, but also lose out on spend-based benefits.
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Impact on Credit Score
Although a credit card cash advance may not have a direct impact on your credit profile, it can still lead to situations that can negatively affect your credit score. When you withdraw cash, the withdrawn amount starts accruing interest charges, which can add up quickly. Even if you pay the minimum amount due, these charges keep accumulating. As the amount you owe grows, you may find it difficult to pay it back in full, leading to late payments that are reflected in your statement, thus decreasing your credit score.
Though quick and easily accessible, credit card cash advances can actually end up costing you substantial money and become a financial burden if not handled responsibly. This is because of factors like additional charges including cash withdrawal fee and interest charges, lack of rewards earnings, and the risk of falling into a debt spiral and damaging your credit profile. So, credit card cash advances must be avoided unless it is an emergency and is absolutely necessary. Instead, consider using your debit card for cash needs, and if you have a financial emergency, it may be more practical and cost-effective to get a personal loan.
Hi, I’m Dev Kirtonia, Founder & CEO of Dev Library. A website that provides all SCERT, NCERT 3 to 12, and BA, B.com, B.Sc, and Computer Science with Post Graduate Notes & Suggestions, Novel, eBooks, Biography, Quotes, Study Materials, and more.