Taking cash out on a credit card – all the ways you pay more

It can be expensive to use your credit card for cash – and you might not even realise you’re doing it.

I’ve been full-on with filming for the next series of Shop Smart Save Money so I’ve enlisted the help of my blogging friend Sara Williams for this guest post. Sara writes the fantastic Debt Camel blog, where she looks at everything to do with debt and credit ratings. 

You probably know it’s more expensive to take cash out on a credit card than if you bought something costing that much. But did you know that most credit card companies have three different ways to rack up the charges on cash advances? And that these extra charges don’t only apply to getting cash at an ATM? They also apply to “cash-like” transactions?

The extra fees on cash transactions

There are three ways you pay more for these cash withdrawals.

First, the interest rate on a cash transaction is usually higher than on a “standard” transaction, when you buy something.

Second, you get charged this interest rate immediately you withdraw the money. When you buy something, there is a period of several weeks – usually between 45 and 60 days – when no interest is added. When you get your next statement, you won’t be charged any interest on the new purchases showing, so if you clear your whole credit card balance then, you never pay any interest. But if you have taken cash out, there will be an immediate charge on your next statement.

Third, there is often a transaction fee that is charged on top. This may be dependent on the amount you have taken out, say 3% with a minimum of £3. So it’s “cheaper” to take out c£150 in one go than in two transactions.

And if you use an ATM abroad, there may be extra foreign transaction fees, from your credit card and sometimes from the local bank as well. Though there are exceptions – more on this in a bit.

What are “cash-like” transactions?

Credit cards treat the following transactions as “cash-like” and charge you the higher interest and fees on them:

  • buying foreign currency, pre-paid foreign currency cards or Travellers Cheques at a bank or a Bureau de Change;
  • gambling and betting, including lottery websites;
  • making a cash transfer, to your bank account or to someone else by wire transfer;
  • adding money to a pre-paid card;
  • buying a Money Order to send to someone.

That isn’t a complete list. If you want to do something that is basically moving money around or using your credit card to “buy” a different sort of money, this may be treated as a “cash-like” transaction. Ask your credit card company what you will be charged before you do this!

If you are wondering how your credit card company will know you have just used your card on a sports betting website or to buy Lottery tickets, there is a Merchant Category Code (MCC) attached to each transactions. These identify types of gambling, as in some countries customers are not legally allowed to use a credit card for gambling.

Taking cash out on your credit card overseas

If you spend a lot on holidays abroad it may be worth getting a special “travel credit card”. These are cards that work just like a normal credit card – you spend on them abroad and get a monthly statement to pay off – but they are cheaper than using normal credit cards on holiday.

Andy has reviewed some in Travel money: my top ways to spend on holiday.

Some of these have:

  • no foreign transaction fees;
  • better exchange rates;
  • no ATM fees for cash withdrawals abroad (but you may still be charged by the local bank and you will also start incurring interest immediately).

These cards can work out to be the cheapest option for travel money. If you already have one, check it’s still the cheapest a few months ahead so you have time to get another card if a the is a better alternative this year.

A very expensive form of emergency cash

Apart from planned spending on these travel cards, it’s best to avoid taking money out on a credit card at all. All those extra fees add up to big profits for the card company and a big problem for you.

Once in a blue moon, in a real emergency, that’s fine.

But figures from UK Finance, the trade association for banks and credit card companies, show that £5 billion pounds was taken out last year in cash withdrawals from credit cards. There were more than 2.8 million cash advances on credit cards on November 2018 alone – that’s not peak holiday time. That seems like an awful lot of “emergencies”…

Lots of people are taking cash out just to scrape through somehow to the next month. But then the high fees make your situation worse. If your debts are too large and you have bills you can’t pay, read this article over on Debt Camel about Money and debt worries – because cash advances are making your position worse, not better.


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