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CREDIT cards often charge varying amounts of interest on account balances resulting from different types of transactions.
Credit card usage is generally split into 3 types of transaction:
- Purchase transactions
- Cash transactions
- Balance Transfers
Cash transactions tend to carry higher rates of interest - and can also incur handling fees - than purchase transactions.
Cash transactions include credit card usage such as:
- ATM cash withdrawals
- 'Cash back' at the supermarket
- Buying foreign currency or traveller's cheques
- Money transfers to current accounts, etc...
Depending upon the card they can also include:
- Gambling transactions - sometimes including buying food or drink at a gambling establishment.
- Credit card cheques
How much do cash transactions cost?
Generally speaking, most credit cards levy much higher rates of interest and handling fees onto balances resulting from cash transactions. The rate of interest charged can be sometimes double the rate charged for purchases, and there is also usually a handling fee of around 2% - 3% of each transaction amount.
What can really make cash transactions costly though is that interest is usually always charged from the date of transaction – regardless of whether you repay your statement balance in full each month – and more often than not, the cash transaction balance on your account will only be repaid once you have first repaid any other balance resulting from purchases or a balance transfer.
It's this 'allocation of payments' clause that can see cardholders coughing up a lot of cash in interest charges for cash transactions whilst they try to repay a 0% balance transfer / or 0% purchase spending.
Avoiding the cost of cash transactions
There was a time when a cash transaction was just another term for withdrawing cash via your credit card.
However, the number of items and services that are now construed as cash transactions by credit card companies has grown, and it is important that you familiarise yourself with these in order to try and avoid the charges and interest that is applied to these transactions.
The transactions that are classed as cash transactions can differ between credit card issuers, and these have recently been widened, which means that there are now more transaction types that come under this umbrella.
Cash withdrawals, of course, come under the umbrella of cash transactions. Other types of transactions that are classed as cash transactions include getting ‘cash back’ at the supermarket (even when you are also paying for your weekly shopping), buying foreign currency or traveller’s cheques, money transfers, financial transactions such as making a mortgage or bill payment, and gambling – including any transaction made at a gambling establishment, such as buying food or drink.
By reducing the amount of times you make these transactions with your credit card you can avoid having to pay the costly fees and interest charges that are applied.
In order to be sure that you know exactly what is construed as a cash transaction you should read the small print in the terms and conditions of your credit card. This means that you will be able to avoid making these types of transactions, which could save you a small fortune in charges and interest.
Are there any alternatives?
Far and away the best alternative to using a credit card for accessing or buying cash is your debit card – not only will you steer clear of any interest charges, but you can also save on the handling fees too (note that some debit cards do charge handling fees for foreign currency purchase and other cash transactions).
Secondly, you can also look at taking out a credit card that is better suited to cash transactions than it’s counterparts.
Low cash transaction interest rates can usually be found amongst credit cards offering low rates on purchases – although this is by far a hard and fast rule. Compare low cash transaction rate credit cards.
There are also credit cards that are particularly well suited to overseas use – offering reduced cash transaction charges and cheaper – if not free – foreign commission charges. Compare use abroad credit cards.
Compare cash advance credit cards
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