Withdrawing money from your credit card is usually much more expensive than paying with plastic, especially during the holidays – but the number of those transactions has jumped over the summer, new data shows.
More than 12.8 million cash advances – most often ATM cash withdrawals with a credit card – were made between May and August 2018, up from 8% over the same period on previous years. UK Finance figures analysis found.
Withdrawing cash from your credit cards tends to attract a much higher interest rate, which is usually charged from the day you make the transaction, and lenders will charge a fee for the lien.
Despite this, credit card users borrowed £ 1.71bn using transactions classified as cash advances – 5% more than in the same period in 2017. On average, borrowers took £ 134 , up from £ 128 last year.
Which? explores what a cash advance is, how much it can cost you, the impact on your credit score, and what to do if you need extra cash without the fees.
What counts as a cash advance?
The most common type of “cash advance” is when you use a credit card to withdraw money from an ATM.
However, there are different types of credit card transactions that lenders consider a cash advance that might surprise you.
These include gambling transactions, buying foreign currency or traveler’s checks, and investing in cryptocurrency like Bitcoin.
Vacation cash advances
Data from UK Finance shows a trend of increasing cash advances on credit cards in the spring and summer, and a decrease in these types of transactions in the fall and winter.
This suggests that the increase in the number of cash withdrawals could be for vacation spending, even if you will face additional costs abroad.
The cost of cash advances in the UK and abroad
A cash advance is usually much more expensive than just using your card to make a purchase at the cash desk, especially when you’re doing it on vacation.
You will normally have to pay a fee, which can be as high as 3%, as well as additional interest charges. The average interest on cash advances currently stands at 26.5% APR, according to data from Moneyfacts – much higher than interest on other types of transactions like purchases (21.4% APR on average ) and balance transfers (20.8% APR).
If you are abroad when you make the withdrawal, you may also pay non-sterling transaction fees and non-sterling cash fees, as well as cash withdrawal interest.
For example, the Sainsbury’s Bank Dual Offer Credit Card, which offers 29 months 0% on purchase, will not charge you any interest on any expenses you make with the card online or in stores.
However, the moment you make a UK cash withdrawal, you will be struck with 25.9% cash advance interest and 3% advance charge – and if you do so at overseas, you will also pay a 2.75% non-sterling transaction fee.
So taking out £ 130 on this credit card will cost you around £ 137 if you made it in the UK or over £ 140 if you made the withdrawal abroad, even if you pay it back within a certain period of time. ‘a month.
Generally, interest on cash advances is applied from the day the money is debited from your account until it is paid off in full. This may be the case even if your credit card offers an interest-free borrowing period on purchases.
So even if you pay your bill in full at the end of the month, you still risk having to pay interest on cash withdrawals.
What the banks say
Banks claim to charge additional cash advances because of the additional costs incurred.
A spokesperson for the UK Finance Department told Which ?: “There are often additional costs to suppliers when credit card cash withdrawals are made, which can then be reflected in the charges. global applied.
UK Finance says its statistics show that the proportion of total credit card loans made up of cash withdrawals has remained fairly constant overall and has in fact declined from 2.66% between May-August 2017 at 2.61% in May-August 2018.
How Credit Card Cash Withdrawals Affect Your Credit Score
Besides costing you more, using a cash advance on your credit card could potentially hurt your credit score.
The credit reference agency Experian said who? that using your credit card at an ATM is generally considered an indicator of risk, although it is not common for lenders to use this type of activity in their scoring.
However, it’s important to realize that activity is recorded on your credit report so that any lender – even if they don’t initially use it to score you – can take it into account if they want to.
This can happen if the lender has to manually review your report, or it could be a factor in some lender’s affordability ratings, especially for mortgages where the way you manage money is in the spotlight. .
How to Avoid Paying Cash Advance Scam Fees
As a general rule, try to pay with your card at the register to avoid having to withdraw cash on credit.
But if you must use a credit card to withdraw cash, be sure to check the fees that will apply. This should be clearly stated in the terms and conditions of your credit card.
Keep in mind that cash withdrawal fees vary and some lenders offer products that may be more suitable depending on how you use them. The cards below may be worth considering if you plan to withdraw money on credit.
If you need cash on vacation
If you need to spend abroad and are likely to need to withdraw cash, there are a number of specialty travel credit cards that will save you money.
the Santander Zero Credit Card comes with no foreign transaction fees (when done in local currency) and no cash withdrawal fees wherever you use it. However, it does generate 18.9% interest on cash withdrawals as soon as the money is debited from your account until it is refunded. This card has a representative of 18.9% APR.
The Barclaycard Platinum Travel credit card does not charge any transaction fees other than GBP on overseas spending and ATM withdrawals (valid until August 31, 2022). Importantly, this card offers a 56-day interest-free period on overseas cash withdrawals if you pay what you take in full and on time each month. The card has a representative APR of 21.9%.
If you need cash in the bank
With a 0% Money Transfer Credit Card, you can transfer money from a credit card to your bank account at no interest, plus a one-time processing fee.
These types of cards could be an option to pay off expensive overdraft debt at a better rate.If you need money for a cash-only purchase, the card can help you borrow interest-free and avoid withdrawal fees. money. your credit card.
the Tesco Bank Clubcard credit card for balance and money transfers 36 months offer 0% on money transfers with a 3.94% fee. So you can transfer £ 130 to your checking account for £ 3.94 and pay zero interest.
Typically, 0% money transfer transactions are rare, but can be associated with 0% balance transfer transactions if you look closely.
Which? Limited is a representative appointed by an introducer of whom? Financial Services Limited, which is authorized and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage advisors and which ones? Money Compare are trade names of which? Limited financial services.