Don’t use your credit card to do this!

by Serena Cowdy on 20 April 2010  |  2 comments
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Serena Cowdy looks at the perils of withdrawing cash with your credit card

Used sensibly, credit cards can help you get your money situation back on track.

However - used incorrectly, that ‘fantastic plastic’ could also spell financial disaster. I’m going to talk about one of the things you should never do with your flexible friend!

Cash withdrawal symptoms

When you use a credit card to withdraw cash from an ATM, your wallet will be hit extremely hard. That’s why you should never do it in anything other than an absolute emergency.

You’re likely to be penalised in four different ways. Here’s a breakdown of what they are:

Whopping interest

First, credit card cash withdrawals are charged at a whopping rate of interest - generally around 25% or even more. That’s around 10% higher than a credit card’s typical APR.

No grace period

Most credit card transactions grant you a 0% period of around 55 days. You have that amount of time to pay off your debt before interest starts being charged.

However, this ‘grace period’ does not apply to cash withdrawals: In fact, you’ll start being charged that huge interest rate as soon as the money leaves the machine.

Withdrawal fee

On top of all this, you’ll usually be charged a cash withdrawal fee of between 2% and 3%, with a minimum charge of £2 to £3. That means withdrawing just a tenner could cost you £3 on the spot.

Negative order of payment

Finally, most credit cards operate negative order of payment. This means that the most expensive debts - those charging the highest rate of interest - will be the very last ones to be cleared from your balance.

This is the final sucker punch. If you make a cash withdrawal using your credit card, the chances are this debt will stay on your card until you’ve paid everything else off. And all the time, the interest will be building up at that enormous rate. Don’t do it!