What is something which does not look like a loan, but is?
The answer is CASH withdrawn from a credit card. It is a loan!
While credit cards offer a lot of advantages but Cash withdrawal from Credit Card using ATM is not Free at all. You must know this and a few other important things regarding credit cards.
Imagine one evening you are returning home from your work and realise that you are short of cash to pay for your rent. You find an ATM, insert your debit card and due to some server issue, it is not working.
In desperation, you take out your credit card and insert it to withdraw money. It shells out the required amount and you return happily to your home. Next day you pay your rent and all things go well.
Unlike other purchases, banks do not give an interest-free window of 1 to 45 days to repay cash withdrawn from an ATM using a credit card.
Credit card spends either at a shop or online gets you around 1-45 days (Credit Period) to pay back, depending upon your credit cycle and purchase date. After this period ends, either you have to pay the amount or pay it later along with interest.
Most banks charge 2-3.5% interest per month on credit card spends, which comes to 24-42% per annum. For instance, if you spend Rs.10,000 in a month, you get charged nothing if you pay in the credit period.
However, when you withdraw cash using your credit card this interest-free window of 1 to 45 days is not available. You are charged the interest right from the day you make the withdrawal. Therefore, it’s a loan!!
Today, the card-issuing banks charge a fee as well for each cash withdrawal. This fee could be in the range of 2-3% of the amount being withdrawn or a flat fee decided by the bank.
Let’s understand this by an example,
|Cash Withdrawal Fees||300|
|Interest Fees (at 3%) in 30 days||300|
|Total payable in a month||10,600 + Taxes|
|Total if not paid for a year||10,000+300+36,00 = Rs. 13,900 + Taxes|
So if deferred you may end up paying around Rs. 4000 more as your interest. That is 40% of the wealth destroyed!
Note: Cash withdrawal doesn’t generate reward points as well on your credit card.
What you should do
- In an emergency, do not withdraw money from the credit card. Instead, look for other payment options.
- If you need cash urgently, rather than withdrawing cash from credit cards, ask for help from friends and family.
- Credit cards are accepted in most of the places as a payment mode like Hospitals, emergency medical services etc. Swipe your card so that you can get 1-45 days of credit window to repay.
- If you still need to withdraw cash, repay it at the earliest without any delay. Don’t wait for the billing cycle.
- If the withdrawn amount is high, you can approach your bank to convert the credit card dues into a personal loan or you can take a personal loan to pay your CC dues.
Both Personal loan and credit card cash withdrawals are a kind of loan but at significantly different interest rates. Learn more about when to take a personal loan and when to swipe a credit card. If you are still confused, you can use our calculator to decide between a personal loan and credit card spends.
At RefreshMint, Our dedicated team constantly works on finding solutions to keep you out of such troubles and generate constant alerts for you. One mistake like the above example could lead to the destruction of your wealth which is much more than what you can earn from investments. RefreshMint is a financial App, designed to simplify finances for the young Indians. With us, you get full control of your financial life. Get a free financial health check-up with RefreshMint today.