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Last Updated : Dec 31, 2014 05:07 PM IST | Source: CNBC-TV18

Credit card cash withdrawal: Think twice! Be wise

Pankaj Mathpal, Optima Money Managers while sharing his outlook on how to manage personal finance, gives insight into the different payment costs involved when one withdraws cash through credit card.

Pankaj Mathpal, Optima Money Managers while sharing his outlook on how to manage personal finance, gives insight into the different payment costs involved when one withdraws cash through credit card.

He also cautions about free insurance included to sell a credit card. He says one must read the terms properly and only then go in for these insurances. Also avoid buying such insurances through telemarketing he advised.

Also read: Check out: Tips to prevent credit card frauds

Below is the verbatim transcript of his interview on CNBC-TV18

Q: Credit cards come with freebies. They allow you to have instant withdrawal of cash. You can go to a point-of-sale (POS) account and withdraw cash that is one of the more recent conveniences that were given in the last one year. Credit cards also come with embedded insurance policies. Apparently it looks like that is free insurance. Are they really free? Just tell us what are the costs for both withdrawing money with your credit card as well as availing of the insurance that apparently comes free with a credit card?

A: You have to pay transaction charges on cash withdrawal on credit card, which are as high as 2.5 percent of that cash withdrawal and then you have to pay interest on that. Usually, when you use your credit card on merchant outlet or online for buying something you get a grace period, which is called an interest free credit period, but that is not applicable for cash withdrawal. When you withdraw cash from credit card, right from the first day you have to pay interest and this interest is also not very low; it ranges between 24 to 48 percent per annum on that advance amount that you have withdrawn.

Your have two choices to pay this amount, either minimum balance amount or full amount. So if you are unable to pay minimum amount due, you have to pay late payment charges which maybe 30 percent of the outstanding balance. Apart from that if you are not paying the full amount you are paying that interest, which is 24-28 percent per annum. Also the grace period which is applicable for your other transactions, if the full amount is not repaid before due date then you do not get any grace period and you have to pay interest on the new purchase from the day one.

So all this included interest charges will cost more than the conveyance of withdrawing cash.

To sum it all up, for example if one withdraw Rs 100 from debit card he will be taking home Rs 100 itself, but if one withdraws Rs 100 through credit card then one will be taking home Rs 75 at the end of first month because one would have paid out 24 percent interest as well as 2 percent transaction tax.

Q: Is it expensive, if I take the insurance that comes with a credit card?

A: The insurance policies, especially health insurance or life insurance policies which are offered on your credit card are not free. They will tell you the cost for that but I would advise not to buy such insurance policy because firstly, these policies are offered to you through telemarketing. So you cannot go through the documents before buying this and you have to opt for this online, so maybe many things are not disclosed to you.

Secondly, these policies are issued with special tie-up with these credit card companies. If you want to cancel your credit card you may not be able to renew your insurance policies. So, there is limitation with these policies. Also in case of claim these branches of insurance companies will not be able to provide you services. There are different service cells for these policies. If you want to buy some insurance that should also be bought from the insurance companies and not through these credit cards offered because of all these reasons.

Furthermore, if you are talking about accident insurance cover available on credit cards, there are also limitations for those all. You should read terms and conditions before signing any agreement with the credit card for availing these value added benefits.

Sometimes, when you apply for a credit card or agent approaches you they will say that there is no joining fees or annual fee on the credit card. However, if you read the fine print, it says that joining fee is not applicable only if you use your credit card within sayd ‘T’ period for ‘X’ amount. Or it could be that or maybe that annual fee will be waived off if you use your credit card for such amount during the year.

Therefore, when agent says that credit card is free and you do not need to pay any annual fee, you must read terms properly, and then if you satisfied with those conditions then you can go ahead.

Caller Q: I recently got married and both my husband and I want to invest in mutual funds, medical insurance etc. Is it advisable to do it under a joint name or maintain separate accounts?

A: If you both are working and both have separate income, it is always better that you maintain two separate accounts. Investment can be in joint name under either or survivor option, where first name should be of the person who is making payment. Suppose if for example the investor is making payment it should be in the name of investor and if investor’s husband is making payment then it should be in her husband’s name.

However, second account holder can be a spouse; there is no problem in that. Otherwise in income tax there would be come complication and conclusion. Under Section 64 of Income Tax Act there is provision for clubbing of income. Suppose husband invests in the name of wife, any interest or gain earned on that investment will be added to husband’s income. So in such a case, suppose husband is making payment and investment is in wife’s name then whatever income earned by wife, has to be added to husband’s income. There is unnecessarily lot of confusion.

 To avoid all the confusion, it is better that you invest on separate accounts, but make another partner/spouse as joint account holder and opt for either or survivor option. So in case you want to withdraw amount anyone can sign on the redemption slip and amount can be withdrawn.

Same is the case for health insurance or life insurance. There also the proposer should make payment. The person who making payment should be proposer and life assured or in health insurance that insured person can be other family member as well.

Q: Is this recommended even if one person has their own business and one person is a salaried employee, would you recommend the same strategy?

A: Yes, same strategy. If both are earning members they should have separate accounts and for any investment first name should be of the person who is making payment from their account. If he is making payment from business then he should be the first account holder in the investment and second can be a joint account holder.  

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First Published on Feb 22, 2013 04:00 pm
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