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Don't cash in on your credit card

  Typical APR Variable Max Int Free  
14.9% 56 days Credit card product details for this Barclaycard OnePulse BT Card based on lowest standard rates
14.9% 56 days Credit card product details for this Barclaycard OnePulse BT Card based on lowest standard rates
14.9% 56 days Credit card product details for this Barclaycard Platinum Visa based on lowest standard rates
14.9% 56 days Credit card product details for this GM Platinum based on lowest standard rates
15.9% 56 days Credit card product details for this Barclaycard Purchase & Long Term BT Card based on lowest standard rates
* Based on Lowest Standard Rates and is not a full search of the whole market

The banks want your money. If they can't get it fairly then it appears they're willing to pull any amount of financial trickery to get you to part with more than you intended. Witness the recent exhortations for customers to withdraw cash on their credit cards.

0% Balance Transfer & Purchase Cards

Using a credit card to obtain cash is a very expensive method but banks are desperately looking for new ways to raise money, faced as they are with the possibility that the Office of Fair Trading (OFT) may force a cap on overdraft fees. Unauthorised overdrafts are a useful little earner; it is estimated that banks collectively receive up to £3.5 billion in such fees each year, or some £10 million a day.

If that financial gravy train is derailed then it will need to be replaced by another money-raising scam. Already there is much talk of an end to free banking on standard current accounts and earlier this month Royal Bank of Scotland, NatWest and Lloyds TSB announced increases of up to 20% in the monthly fees applicable to packaged current accounts.

See:Going up - current account costs are increasing

Upwards of 7 million people hold packaged accounts which include extras such as travel and mobile phone insurance; it is estimated that 40% of RBS and NatWest's 14 million current account customers pay a monthly account fee.

Want to stay current with what's happening in banking? Learn more about your account's competitors.

An OFT official was reported as saying that the Office feared a 'watershed effect' if overdraft charges were capped, whereby a fall in certain bank charges (i.e. on overdrafts) would serve only to push up charges elsewhere. Pushing customers to withdraw cash on credit cards is a subtle way of raising money, avoiding the overtness of a price hike on services.

The cost of getting cash

Two years ago the OFT capped at £12 the charge levied on people who missed or were late with their credit card payments. A chunk of easy money was lost by banks and credit card companies. Since then, according to Moneyfacts the average interest rate on credit card purchases has risen from 14.9% to 16.4%.

More punitive, though, is the rise in the cost of obtaining money; the average interest rate for credit card cash withdrawals has risen from 18.1% to 24.3%. That has to be the major reason for ignoring banking blandishments on how to use your credit card. Also be aware that many providers levy a cash withdrawal fee which can range from 1.5% to 3% of the amount. Then there can be another loading of up to 3% if you use a cash machine overseas to withdraw money from your account.

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Cheaper debt comes first

Remember, too, that credit card companies generally apply a negative payment hierarchy. The monthly card repayments you make go first towards the part of your debt with the lowest interest rate. The most expensive debt is not reduced until the cheaper debt has been cleared (Nationwide Building Society is among a handful of card issuers proving an honourable exception to this rule).

Before the end of the year it will become a legal requirement to indicate this payment prioritisation on statements; currently companies are not obliged to do so. So, unless you're one of the lucky few who can make a big dent in the amount owing or pay off the debt in full every month, you'll find that a cash withdrawal is costing you dearly for some considerable time. It might be worth considering a 0% balance transfer deal.

15 July 2008 © Moneyextra.com

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