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by Rahul 11 Mar 2008, 22:43
What's the worst thing to do with your credit card? Use it to withdraw cash from the ATM, says a financial expert. In your monthly credit card statement, there is a mention of cash limit. That is the extent to which one could withdraw cash using a credit card. But the googly is the interest rates. It's actually a very expensive proposition to withdraw cash as the interest rates on such withdrawals fall in the range of 40% on an annual basis.

Usually, the credit card company mentions the interest rate as a percentage per month which typically varies from 2.7-2.85% per month. And since this interest is compounded monthly, the effective annual rate of interest tends to be anywhere from 38 to 40% per annum.

Essentially, credit card companies charge the same interest rates for cash withdrawals made through credit cards and for rolling over credit card balances. But if one pays the entire amount on due date, one gets around 30-45 days of interest free credit. But what is important to know is that rule doesn't apply in case of cash withdrawals; the credit card company levies the interest rate the moment you withdraw the cash.

Cash withdrawals can also attract an additional withdrawal fee. This charge falls in the range of 3-3.5% of the withdrawn amount. That will be added along with the interest rate to your bill. Therefore, unless you have emergency needs, do not withdraw cash on your credit card. The better option though is to go for a personal loan.

Says RL Prasad, general manager and head of cards and personal loans at Standard Chartered Bank, "You should look at this option as the last resort. If it's a planned expenditure and you don't have sufficient liquidity then a personal loan is be a viable option."

Credit card cash withdrawals vs personal loan

Personal loan is a better option as the average interest rate on personal loans is between 15-20% per annum. The only handicap however, is that it takes around 7-10 working days for the banks to process personal loans.

For the uninitiated, every credit card statement has a billing date. For example, if your credit card payment is due on March 15 then the bill would have been dated around February 27.

So if you purchase anything on February 28 or later, that payment would be due only on April 15. So you get some time to cough up that money to pay off the dues. If you are unable to pay the outstanding amount, then the credit card company charges a month rate of 2.95% of the total amount. But this breather doesn't exist on these cash withdrawals.