The allure of credit cards has always been strong, offering a sense of financial freedom and convenience. In India, the rising middle class and digitisation have led to a boom in credit card usage for both online and offline transactions.
However, many people are unaware of the financial pitfalls of using the cash from credit card option. While it seems easy to get immediate cash, it comes with several hidden costs and should be used sparingly.
The Downside of Withdrawing Cash from Credit Card
Hefty Fees and Charges
When you decide to withdraw cash from credit card, you’re immediately hit with a transaction fee, often ranging from 2-4% of the withdrawn amount. That’s not all. The interest rates on this withdrawn amount are often exorbitantly high, ranging from 20-40% annually.
Unlike regular credit card purchases, where you have a grace period to repay without incurring interest, cash withdrawals accrue interest from day one. Over time, these charges can add up and create a significant financial burden.
Impact on Credit Score
Your credit score is a measure of your creditworthiness. It plays a crucial role when applying for loans or other credit facilities. High utilisation of your credit card limit signals financial stress to the credit bureaus, especially for cash withdrawals.
This behaviour can negatively impact your credit score, making future loans more expensive or unattainable.
Alternatives to Withdrawing Cash from Credit Card
Use a Debit Card Instead
The most straightforward alternative to getting cash from credit card is using your debit card for withdrawals. Unlike credit cards, debit card withdrawals don’t incur high fees or interest rates.
Of course, this assumes that you have sufficient funds in your bank account. Moreover, using a debit card helps you stay within your financial means and keeps you out of debt.
Avail Short-term Loans
Another viable alternative is a short-term personal loan from a bank or a non-banking financial company (NBFC). These loans often come with much lower interest rates than credit card cash withdrawals. Moreover, you get the benefit of fixed monthly instalments, making it easier to manage repayments.
Online Solutions to Financial Crunch
Pay Credit Card Bill Online for Cashback and Rewards
If you’re tempted to withdraw cash to pay off another bill, consider making that payment directly with your online credit card. Many utility companies, merchants, and even loan providers allow you to pay credit card bill online, and this often comes with added benefits like cashback and rewards points.
This method avoids the cash withdrawal fee and helps you earn extra perks.
Utilise Online Payment Platforms
Today’s fintech solutions offer various ways to transfer money from your online credit card to your bank account for a nominal fee. Platforms like PayPal and various UPI services in India provide such options.
They are more cost-effective than withdrawing cash from your credit card and provide the convenience of instant money transfer.
A Community-Based Approach
Peer-to-peer lending platforms have gained significant traction in recent years. These platforms connect individual borrowers with individual lenders, bypassing traditional financial institutions. The interest rates are often much lower, and you can negotiate the terms directly with your lender.
Benefits Over Credit Card Cash Withdrawal
In addition to lower interest rates, P2P platforms offer flexible repayment options, which can be particularly helpful if you’re going through a temporary financial crunch. This makes it a far more attractive option than resorting to expensive and risky credit card cash withdrawals.
Family and Friends: A Reliable Alternative
The Emotional Quotient
Sometimes, the best financial aid comes from your social circle. Given the emotional bonds, family and friends may offer you a loan without interest or at a very nominal rate. This can be a lifesaver in times of urgent financial need.
While it’s convenient and cost-effective to borrow from someone you know, setting clear terms and expectations is crucial. An informal agreement outlining the loan amount, repayment schedule, and any interest can help avoid misunderstandings and strained relationships later.
You can consider taking out an asset-based loan if you own valuable assets like property, jewellery, or a vehicle. Financial institutions often offer much lower interest rates for loans secured against an asset, making it a more cost-effective alternative to withdrawing cash from credit card.
However, it’s crucial to understand that failing to repay an asset-based loan could result in the loss of the asset. Therefore, weigh the risks carefully before opting for this alternative.
Taking cash from credit card may appear to be a quick fix, but it is fraught with financial dangers like hefty fees, high interest rates, and potential harm to your credit score.
Thankfully, many alternatives provide immediate cash without these pitfalls. From using more straightforward methods like debit cards and short-term loans to leveraging online payment platforms and P2P lending, you have a myriad of financially sound options.