look news india
In today’s modern digital age, credit card has become an important part of our financial lifestyle. From online shopping to hotel booking and bill payment, credit cards are being used extensively everywhere. Banks also offer attractive reward points, cashback and interest free shopping facility for 45 to 50 days to woo customers. But have you ever wondered what happens when you suddenly face shortage of money in an emergency and you withdraw cash from the ATM machine using your credit card? Most of the people think that if the bank is giving us the facility to withdraw money from the card, then it will be just like a normal ATM card. But in the language of financial experts and banks, withdrawing cash from credit card is no less than a major economic crisis. If you also withdraw cash from credit card without thinking, then this decision can be heavy on your pocket. Let us know in this detailed report whether withdrawing cash from credit card is beneficial or harmful and what huge fees and interest banks charge on it.
Whenever you go to a bank’s ATM counter and withdraw cash using your credit card, the process may seem very easy and quick, but its consequences are extremely fatal. When you withdraw money from a debit card, that money is deposited in your bank account. In contrast, when you withdraw cash from a credit card, you are actually taking a short-term loan from the bank. Banks categorize this type of transaction as ‘Cash Advance’. The biggest negative aspect of this facility is that banks do not give you any grace period for this. That means, as soon as you withdraw money from the ATM, your interest starts accruing. Apart from this, it also has a very bad effect on your credit score (CIBIL Score), because in the eyes of financial institutions, repeatedly withdrawing cash from credit card is considered a sign of financial instability or emergency loan default.
The disadvantages of withdrawing cash from credit card do not end here, rather banks start charging many types of hidden charges for this in the initial stage itself. First, banks charge you a ‘Cash Advance Fee’, which usually ranges from 2.5 percent to 3.5 percent of the total amount withdrawn or at least a certain minimum amount (say Rs 300 to Rs 500). Suppose you withdraw Rs 10,000 in cash from your credit card, the bank will immediately deduct processing fees and transaction charges on it. Along with this, sometimes separate bank charges are also added for using the ATM machine. This fee proves to be many times more expensive than the processing fee of a normal loan, about which most cardholders are not aware.
The biggest advantage of a credit card is that if you pay the bill on time, you do not have to pay a single rupee interest. But in case of cash withdrawal this rule completely changes. The ‘Interest Free Grace Period’ of banks ends immediately as soon as cash is withdrawn from the credit card. This means that the 50 day discount on purchases does not apply to cash withdrawals. Banks charge a huge interest rate on this ranging from 36 percent to 48 percent annually i.e. about 3 to 4 percent per month. This interest continues to accrue until you repay the entire outstanding amount along with the principal amount. If you are not able to pay the bill on time, it becomes a cycle of debt that the user gets trapped in.
If you withdraw cash from credit card regularly or even in emergency, it directly affects your credit profile. Due to decline in CIBIL score, you may face huge difficulties in getting home loan, car loan or personal loan in future. Financial experts always suggest that in case of emergency, one should never use credit card to withdraw cash from ATM. Instead, you can take a personal loan from your bank, ask for help from your friends or relatives, or avail overdraft facility against fixed deposits (FD), which have much lower interest rates than credit cards. It is wise to use credit cards only for digital and online purchases and avoid withdrawing cash.