Can you use a money transfer credit cards as an interest-free cash loan

Money transfers credit cards allow you to borrow with a credit card and transfer money into your bank account. You will need to repay the borrowing on your credit card.

What are money transfer cards?

Money transfer cards are a type of credit card that allow you to transfer your credit to your current account. You can then withdraw this cash to spend.

To transfer money from your credit card you will need to pay an upfront transfer fee which will typically be around 2-4% of the total amount of money transferred.

Money transfer credit cards often include a 0% interest period during which you can avoid paying any interest charges on your debts for several months. This is very similar to a balance transfer card, except you can transfer cash instead of credit.

You will need to meet the minimum monthly repayments on money transfer card to keep the 0% interest, and it's generally wise to pay off the full debt before the 0% period expires.

Cash advance vs money transfers

Most credit cards will allow you to withdraw cash from a cash machine — this is usually called a cash advance. So how is a money transfer card different to a standard credit card?

With a standard credit card, cash advances will usually incur extra fees and a higher interest rate than the standard purchase. It would also be very unusual to get any form of 0% interest period with a cash advance.

Taking cash out on a standard credit card via a cash advance is usually a very expensive way to borrow money, but with a money transfer card there's just a one-off fee to transfer a balance to your current account and subsequent cash withdrawals won't be charged.

Are money transfer cards the best way to borrow cash?

Depending on how much you are borrowing, a money transfer card could be one of the cheapest ways to borrow cash.

For example if you borrowed £3,000 on 36 month 0% money transfer card with a 2.5% transfer fee, it'd cost you £75 upfront, then nothing for the next 3 years.

Your minimum monthly repayments would likely be in the region of £30 (the greater of £25 or 1% of the remaining balance), but should be at least £83.33 if you want to clear the balance without paying interest.

If you borrowed £3,000 with a loan with a 3.5% APR and a 36 month term, it'd cost you £3,164.62 in total, your monthly repayments would be fixed at £87.91.

So with a money transfer credit card you could have avoided £164.62 of interest charges, provided you repaid the full balance before the 0% period expires.

Is a loan a better option to borrow cash?

If you wish to borrow larger sums of money, or repay over a longer term, a loan may be more suitable than a money transfer card.

With loans the price is fixed for the entire repayment term, meaning you can see exactly how much a loan will cost you upfront. This can make loans more straightforward to compare than credit cards on a cost basis.

However, loans are less flexible than credit cards. Your monthly repayments are fixed and you must meet them all in order to avoid defaulting.

It is also unusual to see any form of 0% interest period for a loan, so there is no way to dodge interest charges. But, the best loan rates are often much lower than typical credit card rates (ie 3-4% compared to 15-20%).

Is an overdraft a better way to borrow cash?

An overdraft is where your bank will allow you to continue to withdraw money or spend with your debit card, and take your current account balance into negative values.

There is a big difference between an arranged overdraft and an un-arranged overdraft.

Arranged overdraft

An arranged or authorised overdraft is where your bank allows you to spend more money than you have in your account. This is typically capped at a limit, normally somewhere between £500 and £2,000. Normally you will need to pay an interest rate or a daily fee, though it is possible to get a bank account that offers an interest-free overdraft.

Unauthorised overdraft

You'll go into an unauthorised overdraft when you spend more money than you have deposited in your account without your bank’s permission. They will charge you fees and charge a higher rate of interest or a daily fee for doing this.

So, if you have an interest-free authorised overdraft and don't need to borrow more than your overdraft cap, an overdraft is usually the cheapest and easiest way to borrow money.

Read more …

• Understanding the credit card summary box

• How balance transfers credit cards work