Brits rack up interest bill withdrawing cash on credit cards

Over 7 million consumers currently make over 38 million cash withdrawals using a credit card every year, with major providers charging up to 32% APR for this feature - almost double the average purchase APR (17.2%), according to research from uSwitch.com.

The interest rate applied to withdrawals has rocketed by 41% over the past three years from 21.22% APR in 2005 to almost 30% APR today. In 2005, Nationwide offered the lowest cash rate at 16.9% APR. This has almost doubled with a 14.33% APR rise to 31.23% today, an increase of 85% bringing them in line with competitors. However, as Nationwide is the only provider offering a fair ‘order of repayments' system which stipulates that cash withdrawals are paid off first, this could negate some of the interest incurred. Nationwide's approach to ‘order of repayments' is something that all providers should replicate.

Lloyds TSB has also made big changes totalling 12.01% APR in the last three years from 19.90% APR to 31.91% APR today. In the last year alone they have increased cash rates by 9.96% APR (45%). In monetary terms, providers could be raking in up to a staggering £161 million in interest for this service. By hiking rates by more than a third, providers have inflated this income by up to £43 million since 2005.

Cost to the individual

To put this into context, our research has shown that in the last year, each individual has made a total of 5.2 credit card cash withdrawals in both the UK and overseas totalling £500. This actually costs consumers £22.07 each in the average billing period (56 days). Three years ago, the same level of spending would cost just £16.12 in interest over the same period.

Robbing Peter to pay Paul

With the cost of living rocketing, over one million people have resorted to using cash withdrawn on a credit card to pay off other debts such as mortgage, loan or household bill. More alarmingly, over 700,000 actually use it to pay off another credit card bill. With the Christmas spending frenzy just around the corner, a further 1.7 million people plan to fund the festivities by using this facility.

Clear as mud

It's hardly surprising that consumers are unaware of the costs associated with this practice. In May 2005 the Department of Trade and Industry (DTI), in conjunction with the OFT, changed the Consumer Credit Act 1974 to simplify credit card rates. One of the key changes was to restrict the use of APRs in advertising and customer literature to the main purchase rate on credit cards. All other rates, including cash advance rates, were to be displayed as ‘per annum' rates, which do not take account of any associated charges and fees or compound interest, and therefore appear to be lower than their APR equivalent.

The outcome

This has caused further confusion for unsuspecting cash withdrawal customers. More than four out of five (86%) consumers do not know the difference between per annum and APR rates. 61% think that a change from 21.4% APR to 20.89% per annum is actually an interest reduction, in fact this is an increase of 2.58% APR to 23.98%.

The true charges

A cash advance rate is incurred for using a credit card in an ATM and a per annum interest rate is applied (which is higher than the purchase APR) from the day the cash is withdrawn. In addition, unlike standard purchases on credit cards, cash withdrawals are not eligible for an interest free period, so customers pay interest on the amount withdrawn from the day of the transaction. Over one in ten who withdraw cash in the UK (12%) believe it's just the same as withdrawing cash with a debit card, 22% are aware that a fee is incurred but not do not think interest is applied.

Louise Bond, Personal Finance Manager at uSwitch.com, said: "People who use a credit card to withdraw cash may already be struggling under the burden of debt and are forced to resort to this method of borrowing to make ends meet. They can ill afford to pay the exorbitant rates of interest that most lenders are now charging them. While we accept that credit card providers have to make money, and that cash withdrawals carry a higher risk of people getting into bad debt, it is indefensible for companies to penalise their most vulnerable customers.

"With some providers now charging up to the APR equivalent of almost 32% on cash withdrawals, equivalent to some sub-prime credit card rates, cash rates have become sub-prime rates masquerading as mainstream lending. We now challenge the OFT to investigate whether these rates amount to ‘usury' or extortionate lending.

"While the DTI may have intended to simplify things for consumers when they came up with these changes, they have actually caused more confusion. The reality is that most people who use this facility are either unaware of the actual costs incurred, or are so desperate to get their hands on the cash that they don't care how much it will cost them."