Before you withdraw cash from credit card, read this: It could cost you 40% a year

When you are faced with an emergency, utilising a credit card to withdraw cash might seem like a soothing and comforting solution. Still, if not planned properly, it can even turn out to be a serious financial mistake.

Credit card cash advances are completely different from regular purchases of products and services made with these cards. Hence, cash advances can complicate your finances if not fully acknowledged and addressed effectively. This is because unsecured credit can come with very high borrowing costs.

Sumit Sharma, Founder, Radian Finserv, says, “RBI has repeatedly cautioned consumers about the risks of high-cost unsecured credit, and credit card cash withdrawals sit at the very top of that risk spectrum. Interest is charged from day one, often at annualised rates exceeding 40%, along with transaction fees. What many users overlook is that there is no grace period, unlike regular card spending. For short-term liquidity needs, borrowers are better served by regulated, transparent credit products with predictable repayment structures rather than resorting to cash advances that can quietly erode financial health.”

Therefore, keeping the above important factors in mind, let us look at the consequences of availing credit card cash advances:

Interest starts ticking immediately

• No interest-free period applies to cash withdrawals.
• Annualised interest rates can exceed 40%.
• Transaction fees of 2–3% are charged upfront.
• Availing such high-interest debt should be discouraged and avoided.
• Responsible decisions should be made during cash crunches.

Credit health is bound to get damaged

• Cash withdrawals sharply increase an individual's credit utilisation ratio.
• Higher credit utilisation can negatively affect credit scores and damage profiles.
• You can even see a sudden decline in credit scores if this debt is not managed properly.
• Minimum dues barely reduce outstanding balances; the cycle of debt can cripple.
• Recovery notices, surcharges, and in extreme cases, legal action can be taken.

A slippery debt slope

Therefore, costs in such cases are harder to track than regular expenses. It is better to borrow from family members or friends in case the need is extremely urgent and unavoidable. Keep in mind, the design of credit card advances is such that even small withdrawals can snowball into long-term debt and in most such cases, legal remedies are limited.

Therefore, on a holistic basis, these are the reasons that can backfire and make credit card cash advances an unpleasant experience. No sensible credit card user would enjoy facing an endless and difficult-to-manage cycle of interest on availed debt.

Important risk factors to keep in mind

It is vital to keep in mind that credit cards already carry risks such as high interest rates, penalty charges, processing fees, revolving credit traps and potential damage to credit scores if misused. Cash withdrawals significantly magnify these risks. It is prudent to consult a certified financial advisor before using a credit card or taking on any debt to make informed, sustainable financial decisions.

Disclaimer: MintMoney has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. MintMoney does not promote or encourage taking credit, as it comes with a set of risks, such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.