Why you shouldn’t withdraw money from your credit card
Cash-strapped Australians began withdrawing money from their credit cards in droves just before Omicron’s arrival late last year, alarming financial experts.
Reserve Bank data released on Wednesday revealed Australians took more than a million cash advances from their personal credit cards last November, just after the easing of lockdowns by Delta in New South Wales and in Victoria.
Hardline Wealth director and partner Cody Harmon is alarmed by the figures, saying he is surprised that so many Australians are looking for cash given the growing popularity of cashless payments during COVID-19.
The value of personal credit card purchases also reached $23.6 billion in November, but cash advances totaled more than $400 million in the same month.
The risks of using a cash advance
Mr Harmon said cash advances can be risky, even if you’re in a bind, and are “not generally recommended” by experts.
Indeed, withdrawing money from your credit card adds to your debt even further and, according to Canstar chief spokesman Steve Mickenbecker, will likely end up costing you more than regular credit card purchases.
If you’re using cash advances, Mickenbecker said you need to be aware that you’ll be paying a “pretty high” purchase rate (an interest rate applied to regular purchases made with a credit card).
He said that according to the Canstar database, the average credit card purchase rate is 16.88%, while the average cash advance purchase rate is much higher at 19.33%. .
If you use an ATM to get your cash advance, he said you might also be charged a one-time fee of up to $5, but the biggest concern is the interest rate.
Mr Mickenbecker said resorting to the “bad habit” of using cash advances could leave you thousands of dollars in debt.
“If you think about $3,000 of accumulated debt, well, $600 is just interest for a year,” he said.
“It becomes difficult to transfer stubborn credit card debt and you find that you may end up in a bad spiral where you are really working for the bank.”
Tips before diving into a cash advance
Mr Mickenbecker said taking a cash advance should be “close to a last resort”, but gave his biggest advice on what to consider before going ahead:
- Ask yourself: will I use the money for the expenses that I really need to make? If you plan to use the money for discretionary spending, consider whether you should avoid spending money if you can’t afford it right now.
- Make sure your credit card has a low interest rate because you will pay higher interest than your card on the cash rate. Consider switching cards to save money.
- Pay off your debt as soon as possible when you’re back on your feet to avoid accumulating more debt.
What are the alternatives ?
Given the high interest rates and fees associated with cash advances, Harmon said it would be best to get a personal loan or consider peer-to-peer lending.
“We’ve all been in the financially hurt locker,” he said.
“I started a business and I was strapped for money, so I kind of understand that some people are in trouble.
“And when they are, [they should] shift more towards flexible peer-to-peer lending solutions that provide much easier access to credit for individuals without as much underwriting and more favorable terms and flexibility.
Peer-to-peer lending traditionally facilitates the matching of borrowers and lenders or investors through online platforms.
The money lent comes from knowledgeable investors, professional investors or the general public.
Mr. Harmon said this way you can quickly get the money you need to clear your credit card debt.
This could leave you with a five-year personal loan at a lower interest rate, as opposed to a high interest rate on a cash advance, which stacks up against you.
Mr. Harmon said it’s important to get rid of your credit card debt as soon as possible, especially as inflation is expected to rise this year.
“It’s very important to control your cash flow and try to reduce debt now,” Harmon said.
“Because how do you control inflation? Generally, we raise interest rates.
“And so those who have debts in an inflationary scenario are usually punished.”