Now that the Christmas season is well and truly upon us the demands on our finances are starting to come thick and fast. Experts have predicted that we’ll spend a total of £33 billion this year, which easily trumps last year’s festive expenses.
So we’re all spending more and borrowing more. Many people turn to credit cards to cover the spiralling costs – and there are plenty of offers to choose from – MoneyExpert.com research shows there are no fewer than 233 different products currently available.
Using your card for last minute purchases or to control your spending is one thing. But increasingly Christmas shoppers and revellers are turning to their plastic to take out cash, too.
APRs and charges
If you use your credit card to take out cash from an ATM, you are not using it for its intended purpose. Consequently you’ll encounter one of the most expensive forms of borrowing around, and potentially could pay a hefty price for the convenience.
APRs charged on cash withdrawals have always been high; generally speaking always higher than those charged for purchases. But MoneyExpert.com says the average rate has risen further this year to a hefty 25.09 per cent – an increase of 3.82 per cent from 2006. To make matters worse the number of card providers who buck the trend and offer low APRs on cash has almost halved from 11 last year to only 6 now.
And there are fees, too. Each credit card cash withdrawal costs an average minimum fee of £2.83. For larger withdrawals an average 2.61 per cent of the withdrawal is levied, meaning that taking out £200 will cost you over £5 before the interest has had any effect at all. But you’ll still pay £2.83 if all you require is a modest twenty pound note to tide you over.
Out of order
Most shoppers won’t think twice before applying for a credit card and very few read the small print before using their card. But more than three quarters of all credit cards have ‘order of payments’ rules that allow the provider to clear the cheapest debt, most often on balance transfers, first, and the most expensive, invariably that on cash, last. This means that if you used a credit card to withdraw £100 and had a balance of £1000, you would still be paying an average APR of over 25% on that £100 until all but the last £100 was cleared. Not a merry thought.
What to do?
Put simply, the smartest option is not to use your credit card to withdraw cash from an ATM. Ever.
In the main this should be a principle easily stuck to, given that almost all retailers now accept cards for purchases, but there are obviously occasions when cash is a must and the credit card may be the only option.
In this case it’s massively important once all your spending is over and you’ve racked up a sizeable bill to transfer the debt as soon as possible come the New Year. There are literally hundreds of deals available now offering 0% on balance transfers, so to letting the cash withdrawal debt sit on your old card to incur huge interest costs is totally unnecessary.
If making cash withdrawals with your card is a habit you simply can’t break then transferring the balance every couple of months is hardly going to be a practical solution. There are some cards available, notably those provided by the First Trust Bank, that will clear cash withdrawal debt second in the order of payments (after fees incurred). You’ll still be stung be direct fees, and face some high interest rates, but at least you’ll be able to clear the debt before it clears you.