- Why withdrawing cash from your credit card is a bad idea?
- Interest will start mounting the moment you withdraw cash
How many times have you heard people complaining of the troubles caused by utilizing the cash limit offered on their credit card? Many a times, isn’t it? Banks may not tell you the perils of withdrawing cash from credit card at ATMs located in India or elsewhere in the world, as they could look to cash in on your ignorance. But you better avoid doing so and not fall into the lure of cash limit. Let me tell you in one line that cash withdrawal from credit card empties your wallet each day by accruing interest from the very instance. Let’s check out how interest can siphon out your bank balance in a jiffy.
Cash Withdrawal & The Dangers That Come With It
So often people joke by saying, this and that have come to them in dowry post their marriage, obviously expressing the frustration within. Similarly, it can be said that interest comes uninvited with cash withdrawal via credit cards. The interest is calculated from the very first day of withdrawing cash, much unlike a retail purchase where you can avail interest free credit for a period of up to 20-50 days. Cash advance accrues interest at the rate of 3%-3.5% per month, besides incurring a fee at about 2%-3% of the transaction amount, subject to a minimum amount as specified by the lender. Even worse is the fact that taxes are charged over the interest, making it a much more costly affair than you would like.
Scary Calculation of Interest, Fees & Taxes on Cash Advance
It’s better to face the reality than to avoid it. If you have committed the error of using the cash limit of your credit card, you must have felt the pain of soaring interest rates. But those who are immune from the interest charges so far, they better take a note of the calculation to stay away from this bad habit even if they are tempted to.
Example – Pravin Malhotra keeps withdrawing cash amounting ₹10,000 from credit cards every month. Interest on cash advance is charged at 3% per month by the lender. The fee on cash advance is 3% of the transaction amount. Considering his budget, the maximum bill amount he can afford to pay is ₹8,000. Now as we sit in March 2018, let’s check out the charges likely to be borne by Pravin in the entire calendar year.
|Month||Cash Withdrawal Amount (In ₹)||Interest Charges In ₹)||Cash Advance Fee In ₹)||Tax In ₹)||Total Bill Amount on Cash Advance (In ₹)||Bill Paid by Pravin (In ₹)||Total Outstanding (In ₹)|
Summary of Total Interest, Taxes, Fee and Total Bill Amount to be Paid in 2018
|Payment Type||Amount (In ₹)|
|Total Cash Advance Fee||3600|
|Total Bill to be paid @₹8,000 per month||96000|
Calculation of Interest
The interest calculated above is according to the formula shown below.
Interest = [(Outstanding Balance x rate of interest per month x 12 x number of days)/365]/100
You can check another table showing the calculation.
|January||[(10,000 x 3 x 12 x 31)/365]/100 = 305.75|
|February||[(12,660.79 x 3 x 12 x 28)/365]/100 = 349.64|
|March||[(15,373.37 x 3 x 12 x 31)/365]/100 = 470.05|
|April||[(18,228.03 x 3 x 12 x 30)/365]/100 = 539.35|
|May||[(20,678.46 x 3 x 12 x 31)/365]/100 = 632.25|
|June||[(23,724.52 x 3 x 12 x 31)/365]/100 = 701.99|
|July||[(26,852.87 x 3 x 12 x 31)/365]/100 = 821.04|
|August||[(31,120.70 x 3 x 12 x 31)/365]/100 = 920.98|
|September||[(33,508.46 x 3 x 12 x 31)/365]/100 = 991.48|
|October||[(36,978.41 x 3 x 12 x 31)/365]/100 = 1,130.63|
|November||[(40,612 x 3 x 12 x 31)/365]/100 = 1,201.69|
|December||[(44,330.54 x 3 x 12 x 31)/365]/100 = 1,355.42|