Using your credit card to withdraw cash could cost you as much as 27 pence for every pound you take out, according to a recent survey. While your credit card might seem like an essential item for modern living, you could pay dearly if you do not use it wisely.
Every year, British consumers use their credit cards to withdraw £8.3 billion from ATMs. For each transaction, the majority of lenders charge a cash advance fee and begin charging interest immediately on the withdrawal.
While most of us are aware that using credit cards to withdraw cash costs money, a new survey by price comparison site moneysupermarket.com has revealed how high these fees really are.
It reveals that one £20 cash withdrawal per month can result in cardholders paying £65 in fees and interest, or 27 per cent, over the year even if they pay off the balance at the end of each month. In an analysis of eight of Britain's top credit card providers, it found that the average amount someone will pay on those 12 withdrawals will be £36, or 15 per cent.
All of the credit cards surveyed, except Egg, charge a percentage commission for cash withdrawals with a minimum fee of up to £5. On top of this, almost all the banks surveyed begin charging interest on the withdrawal immediately, at rates of up to 27.9%.
“People should think very carefully before using their credit card to take out cash. At a cost of up to 27 pence for every pound taken out, this is an exceptionally expensive way to spend. The real killer is the cash withdrawal fee of between £2.50 and £5 on most cards,” says Rob Kenley, head of credit cards at moneysupermarket.com.
By far the cheapest and best way to withdraw your money is from your current account. However, we all run out of money from time to time. If this happens to you, try to use your credit card to make purchases rather than withdrawals. This way you avoid fees and will have some time to pay off the balance before interest charges kick in.
Most lenders do not charge fees and interest if you have a debit balance on your credit card. If you are traveling abroad, you can use this to your advantage. Simply lodge you holiday spending money into your credit card account and withdraw it while you are away. This can work out much cheaper than other travel money alternatives such as Cirrus or travelers' cheques.
If properly used, credit cards can be an easy and free source of credit. However, it does take some discipline to get the most out of them and beware of hidden fees and charges.
Until last year, banks were charging an exorbitant £25 who exceeded their credit limit, or missed payments. Following a ruling by the Office of Fair Trading, most banks reduced this penalty to £12, which remains far above the actual costs incurred by the banks.
Other charges and fees to watch out for are fees for copies of statements and transactions, and fees for late and returned payments.
As mentioned, a credit card doesn't have to cost you a penny if you use it wisely. The golden rule is to only use it for purchases and clear the balance each month.