We are all warned against using our credit cards to withdraw cash, but do you know why?
The first reason why it is expensive to take out cash using a credit card is the cash advance fee that most cards carry. Add the fee to the higher interest charges that providers often apply to withdrawals compared with standard credit card purchases, and you are looking at a costly visit to the ATM.
With £4.6bn being withdrawn on UK credit cards in the last year, do consumers really understand what a cash fee actually means?
What is a cash advance fee?
A cash advance fee is what you will be charged for making a withdrawal at an ATM using a credit card.
The fee is typically around 3% (or a minimum of £3), which means if you were to withdraw £150 in cash using your card you would have to pay £4.50 in charges. Information regarding a card’s cash fee can usually be found in the summary box or terms and conditions on the provider’s website. If you look in the ‘fees’ section it will be detailed there.
Is a cash advance rate different from the APR?
Not only do providers charge a fee for cash withdrawals, they also have higher interest rates for them.
When you take out a credit card you will be informed of your annual percentage rate (APR), which is the rate of interest you will be charged on purchases and balance transfers if you leave them to sit on your card. However, the rate at which you will be charged interest on any cash advances (ATM withdrawals using your card) is often higher than your standard APR. According to Moneycomms research, the average interest rate for cash advances using a credit card is 25.04%, compared with an average APR of 18%.
Also, whereas most cards have a ‘grace’ period of up to 56 days interest free on purchases if you pay your balance in full before the end of the month, the same cannot be said for cash advances. Interest is typically charged daily on cash advances from the date the transaction is charged to your account until it’s paid in full.
All in all, you are looking at a hefty interest charge if you leave a cash withdrawal sitting on your credit card. Check your card’s terms and conditions for details.
Are withdrawals made abroad different?
The cost of making cash withdrawals when abroad depends on the type of card you have.
Some cards, most often travel specific credit cards, do not have any fee attached to making cash withdrawals when abroad. Once again, this is something you will be able to find out in your card’s terms and conditions.
But bear in mind that you will still be charged interest on your cash withdrawal, and it will be at the pesky higher cash advance rate.
Tip: If you do need to withdraw cash while on holiday, try to pay it off as soon as you can to avoid incurring high interest charges.
Where possible, avoid taking cash out using a credit card. With the combination of a cash fee and a cash advance rate that is higher than your typical APR, and that is charged daily, you are looking at a substantial cost if you decide to flash your plastic at the ATM.
Instead, try to use a debit card, which will not incur any charges.
If you are abroad and need to make a withdrawal using your card, check whether you card carries a fee for cash advances made outside the UK and try to pay off the balance as soon as possible in order to avoid any interest charges.
Interested in avoiding cash fees when abroad? Check out our top picks for travel cards