Should you use your credit card for cash?

Although cash transactions seem to be fading into history, some places still don't accept payment cards. Most are very willing to direct you to an ATM, but what should you do if you only have your credit card? Should you brave the warnings of excessive fees for credit card cash withdrawals?

Well, that depends on what you want to buy, but generally speaking, your credit card should never ever touch an ATM. This is because the different ways you can use your card incur different fees, and using a card for cash is usually the most expensive thing you can do with it.

Young lady checks her credit limit

Why are credit card cash withdrawals expensive?

There are a number of reasons why getting cash using your credit card is expensive.

1. Most ATMs are owned and operated by the big banks in the UK. Running this ATM network costs them a considerable amount, which is never usually directly passed on to current account customers. This works for the banks, but many UK credit card issuers purely operate in the credit card space. They do not have a branch network, and because people use their cards very infrequently for cash withdrawals, they do not have economies of scale with which to negotiate better pricing.

2. When customers buy using credit cards, the transactions go through a process called clearing. This process means the money doesn't necessarily leave the bank immediately. As such, and because credit issuers want to encourage this behaviour because they make money on interchange (the amount charged to the retailer for accepting credit card purchases), interest isn't charged on purchases until the following billing cycle. Customers who pay their full retail balance on time never accrue interest payments.

Cash is treated differently by credit card issuers because money must be instantly available from them, and there is no immediate revenue from the interchange. As such, interest on cash transactions starts accruing immediately.

3. The fact that interest is charged immediately on cash transactions is further compounded by the fact that the interest rates for these transactions are often much higher than those applied to other types of transaction.

4. And, finally, cash transactions tend to incur an additional fee of around 3%, which you will also start paying interest on from day one.

When cash isn't cash...

Hopefully, you now appreciate that using your credit card for cash can be very expensive, but that's not the end of the story. Many people come unstuck with cash advances because they fail to understand the types of transaction their issuer considers to be a ‘cash transaction’.

As well as ATM cash withdrawals, the following types of transactions are also considered ‘cash transactions’ by most credit card issuers.

  • Purchasing Traveller's Cheques
  • Purchasing foreign currency
  • Placing bets (including some lottery ticket purchases)
  • Purchasing gift cards
  • Electronic cash transfers
  • Paying utility bills
  • Making monthly mortgage payments

Credit score impact from cash advances

Alongside the expense, there is yet another reason why people should be very wary of cash advances. Cash advances, like other actions undertaken with a credit card, are recorded on your credit report. Issuers themselves understand the prohibitive nature of cash transactions, so if they see them in your file when you apply for other products they are very likely to infer that you have no alternative sources of money, and are likely to be a more 'risky' customer.

Alternatives to cash advances

Although traditional methods for getting cash from your credit card are expensive, there are ways that the costs can be minimised with the right product selection.

Money transfer cards are a relatively new phenomenon in the UK credit card market. In many respects, they are similar to balance transfer cards, in that they offer you the ability to transfer money from your card. Where they differ, and what is making them an increasingly popular alternative to other cards, is that they allow you to transfer money directly into a current account.

As with balance transfer cards, there is a transfer fee associated with making the transfer (often around 4% of the transferred amount), but once the money has been transferred, the interest rate charged can be as low as 0% (compared to around 30% for standard cash advances).

Of course, there are disadvantages to using money transfer cards. For instance, purchases made using cash which has been withdrawn will not gain the protection of Section 75, which they would have if they were bought directly with a credit card. However, compared to standard cash advances, they are a considerably cheaper way to get money from a credit card.


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