Borrowers withdrew more than £15million in cash a day on their credit cards last month – fuelling fears that Britain is in the grip of a dangerous debt binge.
Figures from industry group UK Finance showed £468million of cash was withdrawn on credit cards in August, the biggest monthly total since 2009 during the last financial crisis.
The average amount taken out in each transaction was £142.
Experts warned that withdrawing cash on credit cards was ‘ruinously expensive and a sign of severe financial difficulty’.
Figures from industry group UK Finance showed £468million of cash was withdrawn on credit cards in August, the biggest monthly total since 2009 during the last financial crisis
It is often seen as a danger sign because households tend to avoid using their credit cards for cash unless they have no money left elsewhere, such as their bank account.
Jane Tully, of the Money Advice Trust, the charity that runs National Debtline, said: ‘Credit cards are not designed to be used like this and interest charges make this very expensive. Using your credit card in this way regularly is a sign of financial difficulty and suggests that you should look at your financial situation.’
The surge in cash withdrawals by hard-up families struggling to make ends meet pushed credit card debt up to a record £64.7billion.
The figures came a day after the Bank of England warned that Britain’s banks could lose £30billion on credit cards, car finance deals and personal loans in the next downturn as heavily indebted borrowers fail to repay what owe.
Financial experts at moneyfacts.co.uk said that cash withdrawals ‘rank as the most expensive thing you can do’ with a credit card. As well as charging higher rates of interest than for purchases in shops or online, many credit card providers charge a fee for cash withdrawals.
For example, while the Barclaycard Freedom Rewards credit card charges 21.9 per cent on purchases, it charges 27.9 per cent on cash withdrawals on top of a 2.99 per cent fee, with a minimum payment of £2.99.
The average amount taken out in each transaction was £142. Experts warned that withdrawing cash on credit cards was ‘ruinously expensive and a sign of severe financial difficulty’
The NatWest Reward credit card carries a 3 per cent fee on cash withdrawals and an interest rate of 25.9 per cent – well above the 18.9 per cent charged on purchases.
Rachel Springall, finance expert at moneyfacts.co.uk, said: ‘Even if you pay off the balance, and avoid large interest payments, you are going to get charged. You have to pay for the money.
‘A lot of people may not realise this but withdrawing cash on the credit card is different from buying goods.’
On top of the cash withdrawal fee, credit cards are typically a more expensive way to borrow than personal loans. Figures from moneyfacts.co.uk show the average interest rate on cash withdrawn on credit card is 27 per cent.
By contrast, a personal loan of £3,000 typically has an interest rate of 15.4 per cent while the average charge on a £5,000 loan is 7.3 per cent. For loans of between £7,500 and £10,000 the average interest rate falls to 4.6 per cent.
Figures from moneyfacts.co.uk show the average interest rate on cash withdrawn on credit card is 27 per cent
Mike O’Connor, of the StepChange Debt Charity, said: ‘Stagnant wages and inflation are squeezing disposable incomes, leaving millions of households short of money.
‘There are more than 3million people using credit cards to pay for everyday household expenses. Borrowing cash on a credit card is ruinously expensive and is a sign of severe financial difficulty.
‘Over 4million people in the UK are in persistent credit card debt. Hefty fees and interest rates make cash advances very expensive and can make problem debt worse.’
Justin Modray, founder of consumer group Candid Money, said: ‘For a lot of people it has got to the point where they need to borrow in order to get by. Many just look for the simplest way to do that, even if it is not the most cost effective.’