Why Does Withdrawing Cash from a Credit Card Cost You?

The answer might surprise you!

During our recent masterclass, *"Click, Tap, Swipe: How Do We Make Payments?"*, one of the standout questions was about credit cards and the hidden costs involved in withdrawing cash from them. It’s a common experience—many of us have been surprised by the fee attached to such withdrawals. But why does this happen, and what does it reveal about how credit cards really work?

A Masterclass in Modern Payment Methods

Led by the insightful Meeta Kabra, this masterclass was designed to help students understand and navigate the world of payments. The session covered a wide range of topics, from traditional coins and cash to digital wallets and credit cards. Participants were highly engaged, asking thought-provoking questions and discussing personal financial practices, even touching on high-profile figures like the Ambanis.

With a great exchange of ideas and active participation, the session was a success, leaving students with new knowledge about managing their finances smartly. Here is a question that Meeta shared a response to.

Answering the Big Question: Why Does Withdrawing Cash from a Credit Card Cost You?

Here’s Meeta’s response to the question, shared with students after the session:

"Hello all,

I realised that I had left a question for the end and forgot to address it. Here is the question and the answer.

Q: Why did you have to pay a fee for withdrawing cash from a credit card?

A: If you remember, this is how credit cards work:

I buy something, say a bottle from Siddharth.

I pay using a credit card.

The credit card company (Visa/MasterCard/American Express) pays Siddharth.

On the due date, I pay the credit card company.

There is something more happening in the background. Siddharth pays the credit card company a fee, usually Rs/AED 2 or 3 for every Rs/AED 100. This is also a reason why some stores in some countries do not accept or avoid taking payments by credit card. Siddharth might be willing to pay this fee because it offers his customers the convenience of using a credit card.

So, remember how I said that if you pay your full credit card bill on time, it is like you have taken a temporary loan from the date you bought it till the due date? This fee Siddharth is paying is in some sense paying for that loan.

Now, if I use the credit card to withdraw cash, no one is paying the credit card company because there is no purchase involved. I am getting cash directly, which I have to pay back only on the due date with the rest of the credit card bill. Therefore, the credit card company charges me a fee for withdrawing cash."

Thank you and hope to see you soon in the full course!

~ Meeta

Want to Learn More? Join the Full Financial Literacy Course!

If this masterclass sparked your curiosity, there's more to discover! Meeta Kabra will be leading a comprehensive Financial Literacy Basics: Introduction for Young Learners for students in Grades 7 and above starting this September. In this course, you’ll learn how to manage your finances effectively, understand various payment methods in-depth, and make wise spending decisions.

To explore the full range of topics and get ahead in managing your money, go here: https://www.giftedworld.org/challenge-page/financial-literacy-basics-course!

The recording of the masterclass is now live here:

Happy Learning!

Warm Regards

Janani Eswar