Using credit card at ATM? Think again

Are you one of those who use your cards the wrong way? Data from the Reserve Bank of India suggests that 43 lakh credit cards were used at automated teller machines (ATM) during the financial year 2014-15. These cards were used for transactions worth a startling Rs 2347 crore.

The number of credit cards being used at ATM machines and the amount transacted has doubled in mere four years. In 2011-12, 21.9 lakh cards were used for transactions worth Rs 1260 crore. Though there are many other transactions one can conduct at the ATM, the amount involved in the transactions tell us that each credit card was used to withdraw cash of nearly Rs 5,500 on an average.

In contrast, even though the number of debit cards is 12 times higher than the credit cards, the transactions made using debit cards at point of sale is less than that of credit cards.

"At the ATMs, 95% of the cards are used to withdraw cash," points Vijay Jasuja, managing director and CEO at SBI Cards. "Usually debit cards and ATM cards are used at the ATMs, but people do use credit cards to withdraw cash when they need money but don't have any in their bank accounts. The charges and the interest rates applicable are communicated to the cardholders as part of terms and conditions, but a very small percentage of credit card transactions are used for emergency cash withdrawal," he adds.

But what's wrong with withdrawing cash using credit card?

When you use credit card to transact at the point of sale, such as hotels or shops, then the amount has to be cleared at the end of the credit cycle, which may be 28-55 days. You won't have to bear the interest cost during that period on the amount transacted. Only if you don't clear your credit card outstanding at the end of the credit cycle you would have to bear the interest and late payment fee.

The rules are a tad different when it comes to cash withdrawals at ATMs using credit cards. The clock starts ticking from the day you withdraw cash. You have to pay an interest to the tune of 2.5-3.5% per month on the amount withdrawn from the very first day. Additionally, a transaction fee is levied every time you use your card at the ATM.

ICICI Bank credit card 'Most Important Terms and Conditions state', "A transaction fee of 2.5% (minimum Rs 250 for ICICI Bank ATMs, Rs 350 for other ATMs) would be levied on the amount withdrawn and would be billed to the Card member in the next statement. All cash advances also carry a finance charge of 2.95% per month (APR 41.75% per annum) from the date of withdrawal until the date of full payment."

Let us understand how you would end up paying hefty charges on cash withdrawals using credit cards through an example. Take for instance a credit card holder Sushma, withdrawing Rs 5,000 cash from an ATM using her credit card. Sushma would have to pay an immediate fee of Rs 250-350, depending upon the card issuing company and the ATM where she used the card. This transaction fee for using the credit card at the ATM would also attract a service charge. Apart from the transaction fee of Rs 250-350, she will have to bear the interest on the cash withdrawal from the day she withdrew the cash, until she pays it back in full. The interest rate applicable to such cash advances are higher than the regular interest charged on a credit card.

Sushma was charged a rate of 2.95% per month on the Rs 5000 cash withdrawal by her card issuer. She repaid the amount 28 days after withdrawing and hence her total interest charge was Rs 135.78. So, in all she paid Rs 385.78 (250 +135.78) as charges. Add to this a service tax of Rs 54 and the total amount shoots up to Rs 439.28.

Some card issuers charge a flat transaction fee of 2.5-3% of the amount withdrawn, subject to a minimum of Rs 250-350. So, the charges could differ based on the money Sushma withdrew. You could end up paying Rs 300 as charge even if you withdrew Rs 100 using a credit card.

Instead, if Sushma had used her credit card directly to pay the merchant, she would have been able to pay the amount at the end of the credit cycle, which is in the range of 25-52 days depending on the card issued, without paying any interest. Unless she revolves credit card dues, she need not pay interest.

There are also restrictions on the amount one can withdraw as cash, which are linked to your credit card limit. For instance, HDFC Bank has capped withdrawals at 40% the credit limit on its premium cards. If one exceeds the limit, then there are additional charges called overlimit charges that are applicable, which range from 2.5-3% of the exceeding amount.

If you are in a strained situation and need emergency cash to meet your requirements, then a better way to go about would be a personal loan. Though there is some documentation required, the interest rate differential would help you save money in that situation.

Personal loan interest rates vary from 12% to 30%, depending on your credit score and profile, but the cash withdrawals using credit cards are charged at an interest rate of 35-50%. Thus, credit card advances are the costliest loans. Also, banks are ready to waive the processing fee on a personal loan for people with good profile. The same isn't the case with credit card cash advance charges.

"Instead of withdrawing cash, credit card holders should use the card to transact and if they cannot pay the money at the end of the cycle, they should convert that into EMI, where the interest applicable will be 14-15%, instead of the hefty cash withdrawal transaction fee and interest applicable," recommends Jasuja.

Another option is to keep a prepaid card handy. If the debit card isn't functioning, you can use this prepaid card to withdraw cash at point of sale or the merchant shop, kirana kiosks, etc. On August 27, the RBI also enhanced the limit for cash withdrawal at POS (for debit cards and open system prepaid cards issued by banks in India) to Rs 2,000 per day from Rs 1,000 earlier in Tier III to VI centres.