Planning to withdraw cash on your credit card? Watch out for the expenses

You could end up paying not just a steep rate of interest but a hefty cash advance fee as well. In several cases the cost of the loans exceeds 36% on an annualised basis

Rahul, 24, landed himself a new job in Delhi at a multinational company. He had just shifted to the new city from Mumbai, but was soon soon hit a cash crunch brought about by a variety of reasons.

The money he got from his parents was exhausted, pay day was still very far away and, to make matters worse, his landlord began pestering him for some more money for the house he'd already paid advance rent and deposit.

All this meant that he needed some quick cash that he was finding really difficult to raise. So he decided to use his new credit card to sort out everything. Just go to the ATM, insert your card, punch in the PIN number and amount and bingo! You get the money you want so badly.

It was only a few weeks later that he realised that easy liquidity comes with some unpleasant side effects. When Rahul received his monthly credit card bill, he was shocked to see the charges -- interest and processing fee -- that the card issuer had bunged him with. 

Like most normal human beings, Rahul didn't care to read the fine print. They call it terms and conditions in commercial parlance.

So while using a card to get the cash you want is quite easy and convenient, the difficult part comes later when you calculate the interest and other charges that you pay on such loans.

A credit card loan is instant, does not require any approvals or documentation and can be withdrawn from any bank ATM within and outside India. However, this option may not be available on all credit cards and the cash withdrawal limits and accompanying finance charges may also vary from one card to another.

Here are some of the charges such loans attract:

Cash advance fee: This fee is charged every time a credit card is used to withdraw cash and typically varies from 2.5% to 3% of the withdrawn amount, subject to a minimum amount of Rs 300 to Rs 500.

Finance charges: You will also have to pay a finance charge on cash advance fee at a rate similar to that charged on the withdrawn amount. It will be levied from the date of withdrawal till the amount is paid back in full. 

Interest: This is charged at the monthly percentage rate and will be levied from the date of transaction till the repayment is made in full. Banks typically charge an interest rate of 2.5% to 3.5% per month on all cash advances. The rate varies, depemding on the bank and the card.

Cash withdrawal from ATM kiosks using a credit card is similar to withdrawing cash using a debit card. Such withdrawals can be done at ATMs of any bank irrespective of the credit card issuing bank. The difference is that debit card withdrawals don't carry any charges since you aren't taking a loan. Also, the cash advance fee may vary from bank to bank.

So, if you withdraw Rs 10,000 on your credit card and it in a month, considering interest rate at 3% and a cash advance fee of Rs 500, you will end up paying Rs 10,800. That's 8% a month in all, or a staggering 96% annualised. Of course, if you spread your repayment, the overall cost of your loan comes down. In a five-month repayment plan on the same loan amount, for instance, the total interest and fee payable would work out to Rs 1,520. That's 36.48%. Your call on whether that's cheap or steep.

Impact of credit card cash advance on credit score:

Your credit score gets affected if you fail to pay even the minimum amount due, so timely payments should be made.

This loan feature has both pros and cons. Here are the benefits and drawbacks in detail.

Benefits

Instant cash: As ATMs are accessible 24x7, you can access cash at anytime anywhere in the country.

No approval, no documentation: Unlike other loans, the cash advance feature does not require any other approval from the bank, nor requires you to submit any documents to avail the facility.

Drawbacks

Fees and charges: Everytime the facility is availed, a cash advance fee will be levied which further attracts finance charges which will be charged from the date of transaction till the repayment is paid in full.

Interest rate: Though the interest rate on cash advance is similar to the interest charged on card transactions, the interest on cash advances will be charged from the date of transaction till the payment is made in full.

Reward points: Irrespective of the transaction amount, you get no reward points for credit card cash withdrawals.

Interest free period: There is no interest free period on cash advances and interest will continue to pile up till you repay your outstanding completely.

TABLE: What the top five banks charge you on credit card loans 

Credit Card    Cash Advance Fee                                     Interest rate 

                                                                                                       Monthly Annulaised

HDFC Bank 2.5% (minimum Rs 500) 1.99-3.5%    23.88-42%

ICICI Bank 2.5% (minimum Rs 300) 2.49-3.5%    29.88-42%

Axis Bank 2.5% (minimum Rs 250) 2.95-3.5%    35.40-42%

SBI 2.5% (minimum Rs 300) Up to 3.35%  Up to 40.2%

Citibank 2.5% (minimum Rs 500) 3.1-3.5%     37.20-42%