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Don't use your credit card to withdraw cash
Rakesh Sharma
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July 17, 2007

Withdrawing cash using a credit card, even though very convenient in an emergency, can turn out to be a very costly affair. Let us first try and understand how a normal purchase on a credit card is billed and then we will move onto why you should not withdraw cash through a credit card.

Every credit card has a billing date on which the bill having a list of purchases is generated. This bill has a certain due date by which the credit card holder has to pay back the bank -  either the total outstanding or the minimum due. Let us assume that the bill date of a particular credit card is the first of every month. Generally the due date is 22 days after the billing date. Hence in this case the due date for repayment is twenty-third of the month.

Now let's say an individual having a credit card makes a purchase a day before the billing day. That purchase becomes a part of the bill that is generated on the first of the month and has to be paid by twenty-third of the month. That way he or she has a maximum free credit period of twenty-two days. If the total outstanding is not repaid by the twenty-third of the month, an interest at the rate of 2.95 per cent per month is levied on the amount that is outstanding.

Hence it makes sense to use the credit card to its fullest immediately after the billing date i.e. a day after the bill date, which in this case is the second of the month.

Assuming that the month has thirty-one days, the purchases made on the second of the month will be listed in the bill that is generated on the first of next month. This bill will have to be repaid by twenty-third of next month. So he has 51 days of free credit (29 days till the bill is generated + 22 days from that day to repay the bill). So one can essentially borrow money without having to pay any interest on it.

But this logic does not work in case the individual withdraws cash using a credit card. There is no free credit period. In case of cash, the interest starts accumulating from day one.

Besides a cash withdrawal charge is also levied. The cash withdrawal charge typically is around Rs 262 or 2.8 per cent of the amount withdrawn, whichever is higher. So let's say an amount of Rs 25,000 is withdrawn using a credit card. So, 2.8 per cent of the amount works out to be Rs 700. Now Rs 700 as we can see is higher than Rs 262, and hence that is the amount that will have to be paid as a cash withdrawal charge.

Interest on cash withdrawn typically varies from 2.7 to 2.85 per cent per month. And since this interest is compounded monthly, the effective annual rate of interest tends to be anywhere from 38 to 40 per cent per annum.

So if Rs 25,000 is withdrawn on the second of the month using a credit card, interest will be charged till the time the bill is generated, that is first of the next month. Hence interest will be charged for a period of 29 days. At the rate of 40 per cent per annum, interest for this period on an amount of Rs 25,000 works out to Rs 794.5. This interest is above the Rs 700, cash withdrawal charge. So a total of Rs 1494.5 has to be paid for withdrawing Rs 25,000 using your credit card.

It is thus advisable to opt for a personal loan as, the interest charged on such loans are far less.

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