It is a common misconception that when it comes to withdrawing cash from an ATM, credit cards are just like debit cards. However, there are hidden charges that could give you a bit of a shock when you receive your next bill so below are a few things to look out for if you are considering using your credit card for cash withdrawals.
If you use your debit card to withdraw cash, you usually won’t be charged. The only times you will incur a fee are when you use a convenience machine or ATMs which are outside of your bank’s network. In most cases, the fee for withdrawing money from your account using these machines will be around £1.50 or £2.
Using a credit card, however, will open you up to a number of financial traps. Firstly, a lot of credit card companies offer up to 59 days of interest free credit if you pay your entire monthly bill off on time. Watch out though, as cash withdrawals are not included in this interest free period and you will begin to amass interest immediately if you use your credit card to take out money.
In addition to this, the interest rate charged for cash withdrawals is usually different that charged for purchases made on your credit card. Unfortunately, in this case different does not mean lower. Some banks will charge over 28% APR for cash withdrawals, a huge increase on the interest charged by most cards on purchases. Additionally, when compared to the 5% base rate set by the Bank of England, it becomes clear why it makes more financial sense to use a debit card for cash withdrawals. As per usual when you start to pay off the debt on your credit card, the cheapest debts will be paid off first, something known as a negative payment hierarchy. This means that you will be continue to be charged large amounts of interest on the withdrawals you have made until you have paid off the entire card, something which could land you in a lot of debt.
As if the extra interest wasn’t enough, if you use a credit card you will also be charged a cash-withdrawal fee of up to 3% of the amount you withdraw, with a minimum fee being £3. While all the above charges apply in the UK, if you want to withdraw cash abroad using your credit card, you will also have to pay extra in addition to the charges already listed. The currency conversion fee adds an extra 2.75% onto the cost of using a cash machine abroad in addition to the fees already in place. You will receive a credit–cheque card from your bank which can be used abroad, but check the terms and conditions that come with the card before travelling so you know exactly what kind of debt you might incur if you use your card for cash withdrawals.
In a recent study for The Fool, it was discovered that three credit cards charge over 30% APR on cash withdrawals, which, when compared with the 0% interest charged if you use a debit card seems like a rip off. Three different credit cards were found to charge a withdrawal fee of 3%, with a minimum fee of £5. If you use a debit card, the most you are likely to be charged for a cash withdrawal is £2 and in addition to this, no interest will accrue on the amount withdrawn. Considering the steep interest rates on most cards as well as the withdrawal fee, it seems to make far more sense financially to keep the credit card for purchasing goods and leave the cash withdrawals for the debit cards.