One of the unique selling points of credit cards is that they come in handy during emergencies, and even let you make cash withdrawals.

However, did you know that the way interest is charged on credit card usage for a non-cash transaction is different from the way interest is charged for a cash transaction?

Non-cash vs cash transactions

When you spend using your credit card, which could be either at a merchant outlet using a point of sale terminal or through payment gateways for online transactions, you get a window of interest-free period for that amount to be repaid. Typically, this period could go up to 45 days. After this period ends, you have to either pay the amount or pay it later along with a monthly interest on that spend.

Most banks charge an interest of 2-3% per month on credit card spends, which comes to 24-36% per annum. For instance, if you have a credit card with a Rs1 lakh-limit and you spend Rs10,000 in a month, you can repay your dues on time and will not have to bear additional charges or interest. However, when you withdraw cash using your credit card, this interest-free window of up to 45 days is not available. You are charged the interest right from the day the withdrawal is made.

In addition, the card issuing bank also charges a fee for each withdrawal. This could be in the range of 2-3% of the amount being withdrawn or a flat fee decided by the bank, whichever is lower.

So, if you withdraw Rs10,000 from an ATM using your credit card and repay it after a month, you will be paying at least Rs500-600 more. The amount may double in a year.

For instance, if the ATM withdrawal fee is Rs300 and the applicable rate of interest is 3% per month, and you make one cash withdrawal of Rs10,000 using your credit card and repay the amount after a month, you will have to pay Rs10,700 (plus taxes) to your bank, which will include the principal amount of Rs10,000, a fee of Rs300 and interest of Rs300 for a month.

In six months, this will become Rs14,600 and in a year, it will nearly double to Rs20,300.

How much cash can you withdraw?

Cash withdrawal limit is basically a sub-limit of your overall credit card limit. The bank determines this limit based on the type of your credit card and your creditworthiness. An entry-level card can have cash withdrawal limit of as low as 10%. This could go up to 30% for premium credit cards.

For instance, if you have an entry-level card with a limit of Rs50,000, you might have a cash withdrawal limit of, say, Rs5,000. If you have been using your credit card for a few years and your limit has gradually gone up to, say, Rs2 lakh, or you have a premium credit card with a Rs2 lakh limit, your cash withdrawal limit could go up to Rs60,000.

These limits and all the charges involved, including interest rate, are communicated to you at the time of issuing the card as well as in other periodic communications from your card issuing bank.

The bank can also change your limit, upwards or downwards, based on your spending pattern or changes in credit profile.

Why should you not withdraw?

Remember that whenever you spend using your card, you are “borrowing". Even though some credit cards offer attractive features like air miles or lounge access, you should not spend through a credit card just to chase some form of reward points. Reward points are incidental to the convenience of using a credit card.

If not paid on time, your credit score will be the first casualty. Credit card outstanding can severely impact your credit score, thereby hampering your future borrowing capability, when you might have a genuine necessity. Moreover, it could lead you to a debt trap. For a Rs10,000 outstanding on a credit card, if you choose to repay only the minimum due each month, it could take you over 30 years to repay the outstanding amount. In the meantime, you would have spent a higher amount in interest payments.

While you should be careful with all your credit card spends, you must think twice before making a cash withdrawal using your credit card. This should be considered only in extreme emergency.

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