Barclaycard promotion encourages cash withdrawals

The promotion suggested that credit cards could be used for 'instant cash' to pay for everyday expenses such as newspapers and coffee.

Barclaycard even increased the credit limits of those who received the letters, allowing them to borrow hundreds to thousands of pounds more using their credit cards.

In other words, the provider couldn't have been more clear: credit cardholders should make cash withdrawals. And soon.

Credit: David Cardinez/Shutterstock.com

Cash consequences

Barclaycard's promotion was less clear, however, on the consequences if their customers followed their advice.

Currently, cash advance transactions, made on a Barclaycard attract an interest rate of 27.9% p.a. variable without the benefit of a standard interest free period in which to repay in full, as is the case with purchases.

Cash advances made with a Barclaycard also attract an additional handling fee of 2.5% of the amount withdrawn, with a minimum fee of £2.50.

In other words, cardholders could soon rack up significant fees for making a cash transaction.

For example, at that rate £500 borrowed over 10 days would attract interest rate charges of £3.32 and a fee of £12.50, so around £15.83 overall.

Borrow the same amount over a full 30 days and you'd pay the same fee but the interest would add up even more, to £11.43. All in all, then, taking out a cash advance and waiting a full month to pay back could cost £23.93.

In addition, cash withdrawals can be made even more expensive as a result of the way payments made to the account are usually applied.

The examples above assume that the cardholder will be able to repay these higher rate transactions with first payment amounts.

However, credit card payments are often applied towards promotional or lower rate transactions first, leaving higher rate balances like cash withdrawals to incur interest until other card usage is repaid in full.

If the borrower is, for example, using a 0% credit card that could mean that the cash withdrawal will accrue interest until the balance transfer is repaid in full first, which could be months.

Irresponsible advertising

Given all those factors, it's unsurprising that commentators have expressed their disapproval at Barclaycard's behaviour.

"When we are going through one of the worst periods of financial turmoil for many years, when people are really starting to struggle with their bills, this type of letter is grossly irresponsible," said Chris Tapp, director of charity Credit Action.

"Making [credit card] cash withdrawals appear more normal in this way, like an everyday activity, is extremely bad advice. It may be good for the company but it is dreadful for the consumer," he added.

Others suggested that borrowing to pay for everyday items was a sign of financial difficulty, not a sign of savvy spending.

Although credit cards are often used for everyday purchases, these critics pointed out, those purchases can be paid off in full without the cardholder incurring any interest charges.

The same can hardly ever be said of cash advances and certainly isn't true in Barclaycard's case.

However, Barclaycard denied any wrongdoing.

In a statement, the card provider said that it had only sent out the proactive marketing letters to its low risk customers, those who it believed would understand the cost of a credit card cash advance transaction and be able to make use of such a facility without falling into financial difficulty.

For further information see our discussion on proactive marketing available here.