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Be careful while using that credit card

Cash withdrawal on a credit card is a costly affair and must be used only in an emergency. Arnav Pandya tells you the several things that you should avoid while using a credit card.

india Updated: Aug 21, 2007 04:42 IST

While there are various ways of using a credit card, there are also several things that one should avoid at the same time.

Knowledge of what should not be done is essential for the purpose of avoiding heavy charges that are likely to be levied on the credit card. One area that needs attention is that of cash withdrawal on the card.

Most people fail to understand the cost involved in withdrawing cash on a credit card. People are used to the concept of a card where the person can withdraw an amount on the card from an ATM.

The Last Option

Cash withdrawal on a credit card is expensive.

It has a different impact as compared with a normal expense on the card.

There is a transaction fee levied.

Interest charges are applicable without any credit period. This option should be used only in an emergency.

But this is usually on a debit card or an ATM card. In the case of a debit card or an ATM card, you are using your own money. But when you do this on a credit card, then a completely different scenario comes into play.

Cash on a credit card should be withdrawn only in an emergency. That is also the reason why there are two major types of expenses that will be incurred on this transaction. Whenever you withdraw cash from an ATM, there is a transaction fee that will be levied. This fee is calculated at a certain rate, usually at 2 per cent to 2.5 per cent of the amount withdrawn. If the rate is 2.5 per cent and the amount withdrawn is Rs 20,000, then an immediate charge of Rs 500 will come into play. <b1>

One thing that has to be understood is that there will be a minimum charge that will be applicable. This could be something like Rs 250-300 and hence a small withdrawal will result in a larger hit as far as the percentage calculation is considered. Even those who know about this fail to realise that there is another expense that is already on the way.

This is the expense related to the finance charge, which is normally payable when the payment is delayed and is also known as the interest charge. Credit cards now have the feature or the condition wherein the charge will be applicable from the date of making the withdrawal and applicable till the time of full payment.

Under a normal expenditure on a credit card there is a credit period available during which there is no interest charged if the payment is made by the stipulated time. But that is not possible for a cash withdrawal.

This means that the bill starts ticking the moment the cash is withdrawn and more important is the time period till which the interest will continue. One has to read the wordings for this carefully because if it says interest till the time of full payment, then even if there is a part payment then the charges will continue until the entire amount withdrawn as cash will be paid back to the credit card company.

(The writer is a Certified Financial Planner)

First Published: Aug 21, 2007 01:58 IST