Don't draw cash on credit cards ::Business Line

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Plastic cards — debit and credit — issued by banks offer flexibility and convenience. Both these types of cards let you shop without carrying wads of cash, and earn you reward points which can be redeemed. They also let you withdraw money on-the-go from automated teller machines.

But there are key differences between debit and credit cards. As its name suggests, a debit card debits your account — that is, it uses cash lying in your account — when you use it for purchases or for cash withdrawals. In other words, a debit card uses cash that belongs to you. On the other hand, a credit card lets you use money that does not belong to you. When you use a credit card for purchases or to draw cash, the bank gives you credit (a loan) which needs to be repaid. The amount available to the user for purchases and for cash withdrawals on the credit card are based on limits set by the bank.

INTEREST METER

Purchases made on credit cards have an interest-free credit period by which time you need to repay the bank. In case you do not pay on time or pay only the minimum amount due, the bank charges you interest on the unpaid amount — at rates as high as 3 per cent per month or 36 per cent annually, or even more. Also, while purchases on credit cards have free credit period, cash withdrawals on them do not have this benefit. The interest meter starts ticking immediately and banks charge interest from the date of cash withdrawal till the date of repayment. Again, the rate at which interest is charged can be quite high — around 36 per cent annually or more. Besides, banks charge processing fees on cash withdrawals on credit cards. All this makes cash withdrawals on credit cards a bad idea, unless there is an emergency where you do not have access to other avenues of cash.

If you need cash, it makes sense to withdraw on your debit card. One, since the money belongs to you, there is no question of any interest payable to the bank. Two, since the amount that can be withdrawn using the debit card is restricted to the available balance in your account, you will likely be more prudent while withdrawing. Withdrawals on a credit card run the risk of lulling you into a false sense of sufficient money being available when it is just being borrowed at high rates of interest. Lastly, cash withdrawal on a debit card does not entail any processing charge.