Credit card users will end up paying significantly more in interest charges when they use them for cash advances compared to using them for purchasing goods.
This is the latest finding of an analysis of credit cards conducted by MoneyWhizz.org, the financial literacy website.
Within the Irish market, consumers that sign up for so-called ‘sweetener’ deals at zero percent interest on balance transfers will be liable for interest charges of 20% or more when they use their cards for cash advances. This higher rate of interest is charged from the point of the cash advance, there is no grace period and payable until the bill is paid in full. Card users could have be paying two rates of interest, one for purchases and one for cash advances until the bill is fully paid off.
“Consumers need to look beyond the interest-free periods and factor in what their credit borrowings will really cost them, particularly now as the holiday season is about to begin” said Mr. Conway.
For this analysis, MoneyWhizz.org compared the leading credit cards on offer from Bank of Ireland, AIB, Permanent TSB, Tesco Bank, KBC and Ulster Bank.
It analysed the cost of repaying a balance of €1,000 using a minimum payment formula popular with most card issuers (3% of the outstanding balance).
AIB’s ‘Click’ card (statements must be accessed online) offered one of the best deals in the market on purchases while the Tesco Bank Club Card offered one of the best deals on cash advances.
Bank of Ireland and Ulster Bank were highly expensive on their ‘Student’ cards for cash advances with interest charges exceeding 21%.
Additional fees and charges
Cash advances also typically incur various other charges and fees which impact on the card’s overall cost of borrowing, measured as the cards annual percentage rate or APR.
Full analysis as follows:
Some important tips on reducing cash advance fees and charges:
As outlined above, one thing to keep in mind when considering a cash advance on a credit card is the higher cost of interest (and APR). Also, users generally will not have a grace period before interest starts accruing. They also typically have transaction fees so it is important to know what this will be before making any withdrawal. Users will have received a copy of the fees from their card issuer or can access the same information on the issuer website (moneywhizz.org was able to access fees data on all issuers for this analysis).
• Transaction fee: You will pay a transaction fee for credit card cash advances
• APR: The APR for cash advances is often higher than for credit card purchases
• Interest-free period: Cash advances often begin accruing interest at the time of the withdrawal, meaning there’s no grace period
Some easy ways to limit the fees associated with a cash advance
• Limit transaction fees. Some transaction fees are a percentage of the overall advance; in that case, you could limit the fee by withdrawing only as much as you need. Other transaction fees may be a flat rate or a combination of a flat rate and percentage of the transaction. In this case, if you take all the cash you think you’ll need at once, instead of making multiple smaller transactions, you only pay the flat fee once.
• Plan your repayment. Remember, your repayment will be accruing interest until the amount is paid off. Always try to have a plan for how and when you’re going to pay back the advance.
How to avoid taking a cash advance
• Make purchases with your credit card. If you have the option, you can often limit interest and transaction fees by charging purchases to your card rather than getting a cash advance.
• Avoid unnecessary purchases. Ask yourself if the purchase you intend to make with your cash advance is worth the extra fees, or if it can wait.
• Check your balance. Don’t use a cash advance as a buffer just because you’re unsure how much money you have in your bank account.
• Create a budget. A budget will help you compare your income to your costs, so you know how much you can save to cover unexpected expenses in the future (to learn more on how to structure a personal budget, check out this free website: http://www.irishfinancialreview.com.
• Build an emergency fund. Occasionally you’ll need to pay for things that aren’t in your monthly budget, such as car repairs. By building an emergency fund when things are going well, you may be able to avoid having to use credit card cash advances for these transactions.
Why do cash advances cost card users more?
In a nutshell, risk! Bank all over the world use what is called risk profiling to assess the patterns, behaviours and risk factors associated with card users. Those that have come to rely on their credit cards are determined as a high risk category of potential default, which is why card issuers charge more. So, for users, they just need to think about the financial consequences.
Frank Conway is the founder of moneywhizz.org, the financial literacy initiative developed for students, young adults and not-so-young adults.
You see the TV ad, parties, fun, sizzle and razzmatazz. You deserve the look and with a few minutes online and clicks of a mouse, you can have the look. Simple! Fast and oh, so easy.
Sounds great, right?
Well if you accept the ads at face value, then yes, you can look great. But what about your wallet, how will it fare? Unfortunately, the picture here can be really uglier!
When you apply the Moneywhizz value checker, you’ll discover how much more you’ll pay for that new summer look than you bargained for.
Online retailers like Littlewoods (aka Shop Direct Limited) and Oxendale (aka Simply Be,Jacomo, The Brilliant Gift Shop) are ramping up their advertising campaigns of late and little wonder. With recession-hit Ireland still on the trawl for a bargain, online shopping has an appeal. For starters, it’s oh so easy! A few clicks of the mouse can be so much more appealing than the drudgery of a car ride or bus trip to your nearest mall.
Littlewoods Ireland even promotes free shipping (deliveries and returns), but with all things ‘free’ it’s the consumer, YOU who ends up paying, big time!
Here’s how it works.
If you use either the Littlewoods or Oxendale credit facility, using the Littlewoods own cost of credit estimate, you pay as follows:
“As a representative example, if you are given a credit limit of €350, you then use your new Flexible Account to buy a single item for €200 and make the minimum payment each month of 10% (or €10 if greater); the total amount payable will be €251.06, spread over 21 payments. The total cost of credit will be €51.06” – Littlewoods website
So, the item didn’t cost what you expected but a full 25% more. Little wonder Littlewoods is not so ‘little’ when it comes to the cost of credit…this is moneylender stuff…but Littlewoods is a registered moneylender with the Irish Central Banks. Same goes for Oxendales; they’re also in the moneylender business…yep, fully registered and signed up as moneylenders with the Irish Central Bank.
In its credit terms, it notifies customers of the cost of credit:
“Your initial credit limit under the agreement will be up to €300. Assuming that you avail of the maximum credit terms, the total amount repayable will be €355.80.” – Oxendales website
Cost of credit at Littlewoods is 43.7% (APR) while Oxendales 39.6% (APR). This IS expensive! Gets you wondering where the real money is being made…clothing or in the money lending game???
To put this into perspective, the most expensive credit cards in the Irish market cost between 18% and 21% so users of Littlewoods and Oxendales end up availing of significantly more expensive credit terms.
It’s also important to note that Oxendales apply credit charges to account balances ignoring any part payments so users get hit full whack. This gets the MoneyWhizz two thumbs down!
What about the convenience and free deliveries / returns.
Littlewoods promotes free deliveries and returns. However, this ‘free’ service is offered through select branded services only from several courier companies. This means that home delivery convenience takes a back seat if you want to avoid additional charges. Yep, bus it, drive it or walk it when you want to collect or return your parcel, is there anything really ‘free’ these days? If you don’t use these designated courier services and you want to return a parcel, this can cost anywhere from €4.50 to €11.50 per item…and much higher depending on the size and final destination!
Both online retailers do provide notice regarding those that may struggle with their repayments and provide contact details for MABS, the State funded personal budgeting advice service. Beginning to wonder if there is a message here???
The bottom line in all of this is how important it is for users to understand the true cost of goods. Finance services such as those offered by Littlewoods and Oxendales can look appealing and make affordability appear reasonable, but over time, the true cost of items purchased can cost a lot more, 25% more and even higher when delivery and returns costs are levied. And it is not just these two companies. Credit finance is big business and even where retailers promote zero percent finance on everyday household items including furniture and fittings, consumers must ensure they check potential money traps, including any fees and charges and even interest charges after those zero percent grace periods expire.
Remember, it’s up to you to be smart with your cash; it’s up to you to become a moneywhizz!
Frank Conway is the founder of MoneyWhizz.org, the financial literacy website developed for students and adults.