According to data released by the Reserve Bank of India, over 2 crore credit cards were used at automated teller machines (ATMs) for transactions worth a startling Rs. 1883.7 million during February 2017. When you insert your credit card into an ATM for cash withdrawal, or visit a bank for the same, you are taking a cash advance or short-term loan against your credit card, up to a certain amount called the credit limit, to fulfil your immediate needs.
Unlike personal loans, which are used for long term financing, which could be financing a big purchase or consolidating multiple debts, credit cards are ideal for short-term expenses that you can pay off in a month. When you are able to clear off the dues within the interest free period, the cash advance via the credit card works out to be the cheapest option. However, when not paid in time, it can have severe effects on your financial situation and future chances of availing a loan or credit card. Cash transactions via credit cards have some charges associated with them, which can make this short term loan really costly.
Why Getting Cash Advance via Credit Card is Costly
Cash advances are one of the most expensive types of credit card transactions, given the fees and charges associated with them. Let us take a look.
Cash Advance Fees:
Every time you take a cash advance from ATMs in India or abroad, the bank or the credit card company is going to charge you a cash advance fee. For instance, HDFC Bank levies a transaction fee of 2.5% (Minimum Rs.300) on the amount withdrawn and will bill it to the card member in the next statement.
Rate of Interest
The most expensive part of taking a cash advance is the interest the card holder will have to pay on the money they’ve borrowed. The interest rate on cash advances is usually much higher than the regular interest rate on your credit card. When you use the card to transact at a point of sale, the amount needs to be cleared at the end of the credit cycle, which may be 28-55 days, where the cardholder won’t have to bear the interest cost during that period. However, the interest on cash advances from ATMs starts building up from the day you take the advance. The current rate of finance charges is up to 3.35% per month [40.2% per annum] on credit cards from SBI bank, applicable from the transaction date. On the other hand, the rate of interest on personal loan is somewhere between 11-20% for most financing institutions. When you repay your loan amount, most banks will charge a cash payment fee of about Rs. 100 + all applicable taxes.
When taking a credit card, it is most important that the monthly interest rate should be as low as possible. For late paying individuals, low interest credit cards (1.5% – 2.99%), could come as a relief.
Your Credit Score
You should know that frequently delayed or missed payments of credit card dues ruins your credit score or CIBIL score, thereby decreasing your credit worthiness. It further increases the chances of denial or cancellation of loans or credit card applications in the future with banks and other financial institutions.
Taking out a cash advance via a credit card could indicate a financial problem. However, when not handled carefully, it could lead you into a bigger cash flow problem in future. Have a closer look at your budget and spending, if you find that you’re frequently using cash advances to pay for things like groceries and utility bills, take stock.
If your credit score is good, it’s better to take a personal loan to take care of immediate expenses, which give your comparatively more repayment time. The interest rate on a personal loan though is higher than other loans in India, but it is still less than half of the penalty interest that is charged on outstanding amounts on credit card dues.