The credit card cash advance trap

Australians waste over $2.15 billion a year on credit card cash advances, "thanks" to a nasty trick that sees credit card companies charge interest on their fees as well as the cash you withdraw.

In the year to March 2011, according to RateCity, a financial comparison website, we spent over $2.15 billion on cash advance interest and fees.

We all know that when you withdraw cash from your credit card, you start paying interest straight away, instead of at the end of your billing cycle.

No news there.

But did you know that — because 67 per cent of cards charge a cash withdrawal fee on top of the interest rate — the real interest you pay on credit card cash advances could be 0.77 per cent higher than advertised? And you pay interest on the withdrawal fee too.

Ouch.

According to Reserve Bank data, credit card holders withdrew around $11 billion in cash in the year to March 2011, averaging about $400 per withdrawal. There may be times when it’s unavoidable — but if you know you’re likely to be using cash advances, shop around for a card that doesn’t charge withdrawal fees, at the very least. And if you find yourself using your credit card for cash frequently, you need to look at other options, like a short-term loan or an overdraft facility.

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