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Withdrawal Symptoms- Cash Costs on Credit Cards

Throughout the credit card industry, the pinch is being felt. The collective cost of 0% transfer offers, bad debts and regulatory ‘interference’ (reducing late payment charges from £20-£25 to a paltry £12) is beginning to bite. Profits need a boost, and preferably from somewhere not so up-front as an annual or balance transfer charge. After all, these in-your-face charges tend not to look so good on the marketing material.

Cash withdrawals (sometimes called ‘cash advances’) on the other hand are a soft target, and issuers look set to squeeze them for all the juice they can get. According to APACS, the UK payments service, cash withdrawals on UK credit cards totalled £8.3bn in 2006. These withdrawals would have resulted in issuers raking in around £164m in charges before any interest was accrued.

Just to remind ourselves, withdrawing cash on a credit card is a bad idea for two reasons:

• Cash Withdrawal Charges: typically at 2.5%, usually with a £2.50 minimum charge.
• Higher APR: and we’re not talking just slightly higher, either. A quick trawl through the high street bank’s offer booklets shows rates at an eye-watering 6-13% higher than those for normal purchase balances. You may also rest assured that the issuer will allocate repayments to this withdrawal balance only after other (cheaper) balances have been paid.

What is a ‘Cash Withdrawal’?

Cash withdrawal- you would have thought it’s an easy concept to understand. It’s the business of taking money out of a cashpoint machine, right? Yes, certainly, but that’s not the whole story.

The fact is that there is currently no standard industry definition of ‘cash withdrawal’. This allows canny (some would say sneaky) issuers to stretch their definition to cover most or all of the following transactions:

• Cashpoint withdrawals
• Purchases of currency
• Purchases of travellers cheques
• Purchases of gift vouchers
• Gambling transactions

Checking exactly which transactions your card covers can mean a complex wade through the definitions (and sometimes definitions within definitions!) in the latest version of your terms and conditions. Don’t be afraid to use that helpline number printed on the back if you’re not 100% sure.

Currency Costs- A Possible Triple Whammy?

Purchases of currency and travellers cheques- hold on, I hear you object, haven’t the issuers already got these covered with their currency conversion charges? Well, yes, the thought did occur to me too, raising the spectre of a single transaction triggering two charges plus a higher APR. The information booklets I read seemed to imply this was the case- so I decided to check out.

Your intrepid reporter spent several minutes braving the piped Vivaldi on the credit card information lines. Posing as someone making regular trips abroad and in need of regular currency top-ups, I asked about the possible triple hit. The good news is, they seemed as bamboozled as I was, a nervous “Er, could you just hold while I go and check…” being the stock response. Well, I held, and this is what I was told:

• Purchases of currency made inside the UK should be subject to the currency conversion charge only.
• Purchases of currency and ATM withdrawals made overseas will take all three hits- both of the charges plus higher APR.

To me, it seems as if the first of these points may be somewhat elastic and subject to change- remember, I was posing as a high-rolling potential new customer, and the sales agent consulted may have been trying to reel me in. If you are going to purchase currency on a credit card, my advice would be to check each time before you buy. When overseas, always use a debit card for ATMs if possible- mine only cost a flat £1 per withdrawal while in the US last year.

Gambling With Your APR

Was that ‘gambling transactions’ you saw sticking out like a sore thumb on the end of my definition list above? It certainly was. We could spend all day debating the philosophical implications of whether placing £10 on the 2.40 at Chepstow is a ‘purchase’ or not, but it’s definitely a cash withdrawal to your card issuer. Some may waive the withdrawal charge, but all apply the higher APR.

You don’t need to be Oliver Stone to see what’s going on here. Look in any men’s lifestyle magazine (no, I don’t mean those on the top shelf- lower down), and chances are it will be plastered with adverts for online casino sites where you too can relive the macho exploits of legendary poker kings like Mike ‘The Mouth’ Matusow and Stu ‘The Kid’ Ungar. On current estimates, there are reckoned to be 1m people regularly gambling online in the UK, spending on average around £1,000 each per year. This is a huge market and one that is growing exponentially. And of course, this is all before the shiny new ‘Supercasinos’ promised by the government get built.

Ominously, card issuers promise to treat as a cash withdrawal any transaction ‘where payment is made to an establishment that is identifiable by us as carrying on gambling, whether or not the purpose of the transaction is payment for gambling activity.’ Sweeping statements like this will need careful review for when Supercasinos come online, with food, entertainment, shopping and accommodation spend requiring clear demarcation.

Credit card companies, offshore gaming sites and Supercasinos- for many an unsavoury alliance, but one that looks set to generate huge profits in years to come. For the humble credit card user, extreme caution can be the only recommendation here.

Cash withdrawals are clearly something of a minefield at present. With many people in the UK holding more than one credit card, confusion could well reign over exactly which type of transaction with which card will trigger charges and higher interest rates. I suspect the card issuers will skate profitably over this issue for as long as possible before the regulatory bodies come down heavy and force them into an industry-wide agreement. In the meantime, take care with cash.

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