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Using a credit card to take out cash is about to get even more expensive, warns Melanie Wright
Credit card users face even higher charges for withdrawing money from cash machines this summer as banks ramp up their transaction fees.
Using a credit card to withdraw cash has always been expensive but, from 28 May, Egg, which has two million credit card customers, is increasing its minimum cash withdrawal fee to £5, or 3% of the amount, whichever is greater, from £3 or 3%.
This means that if you were to make five £20 withdrawals on your Egg credit card over the year, you would be charged a fiver each time - a quarter of the amount. The charge also applies to overseas withdrawals, which incur an additional 2.95% foreign exchange fee.
A spokesman for Egg said: "The aim of this move is to discourage people from making small cash withdrawals. Those who tend to do this are often facing financial difficulties and might be having problems obtaining cash, therefore they pose a higher risk of being unable to repay the money."
Egg is not alone in raising charges. Smile is increasing its cash withdrawal fees from 1 July. The fee will increase from 2.5% to 3% from this date. The minimum charge remains £3 per transaction but, if 3% of the amount withdrawn is more than £3, you will be charged the higher amount. Louise Bond, personal finance manager at comparison website uSwitch.com, says: "The rationale for these changes is reasonable. However, we strongly advise customers not to use this facility on any credit card unless they are really desperate for the cash."
Only two credit card providers do not charge a cash withdrawal fee on some of their cards; Hoare & Co and the Co-operative Bank.
Hemal Kuntawala, 24, from Streatham, south-west London, learned the hard way how expensive it can be to withdraw cash on a credit card.
Hemal, who works in information technology, has a British Airways American Express credit card, which he applied for so that he could collect BA Miles as he spent.
He said: "There was one time when I used the card to take out £700 from a cash machine to pay for audio equipment, as I was offered a better deal if I paid in cash. The charges and interest were really steep so it ended up being a big struggle to pay it back. As a result I now rarely use my credit card to take out cash, and when I do it's only in an emergency."
The Amex BA credit card has a 3% cash withdrawal fee, with a minimum charge of £3, which means Hemal was charged £21 to withdraw £700. He was then charged interest at 27.9%.
He says: "Wherever possible I now use my Halifax debit card to withdraw cash, which costs nothing. But if it's getting towards the end of the month and I am very short on cash, occasionally I will take a hit and pay the charges to use my credit card to get money out. I then make sure I clear my balance as soon as possible to avoid the interest charges."
It's not only cash withdrawal fees you need to watch for - you will also be hit by steep interest charges on any amount taken from cash machines.
Halifax's One Visa card, for example, charges 27.95% on such transactions, while Nationwide's Visa Classic and Barclaycard come in at 27.9%.
Egg and HSBC charge two of the lowest interest rates on cash withdrawals made via their credit cards, at 22.9% and 23.9% respectively.
According to uSwitch, in the past two years average cash withdrawal rates have increased from 23.65% to 26.7% a year, despite the face the Bank of England base rate is at an historic low of 0.5%.
It is also worth remembering that, unlike standard purchases on credit cards, cash withdrawals are not eligible for an interest-free period, so customers pay interest on the amount withdrawn from the day of the transaction.
If you think you might be tempted to take out cash on your card while you are out, leave it at home in a safe place. Credit cards are best used for purchases only as they offer useful protection in the form of section 75 of the Consumer Credit Act 1974.
This means that if you buy any item costing between £100 and £30,000 on a credit card, and the goods aren't satisfactory, the card issuer is jointly liable with the vendor.
So, for example, if you bought an item that was faulty, but the supplier then went bust, meaning you couldn't return the item, the credit card provider would be obliged to refund you.
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