'Paying with credit card cost me £60': the transactions with unexpected costs

Whether you're buying a gift card or entering a fantasy football league, you might not think twice about paying on credit card. Yet both transactions could land you with an unexpected bill - and they're not the only ones.

Payments categorised as a cash advance by your credit card provider will attract a hefty fee, plus a much higher rate of interest, and can even impact your credit score. But while most people realise taking out cash on a credit card will trigger these charges, many are unaware that other purchases may count as a cash advance, a survey by Totally Money found.

Transactions as diverse as lottery ticket purchases and foreign currency are catching people out. In fact, even gift cards may fall into this category, as one woman from Alnwick found out when stung by a double-digit charge.

We reveal what counts as a cash advance, how much they can cost you, the impact on your credit score and how to avoid being stung by these charges.

The payments catching people out

Few Brits understand how cash advances work, though many purchases could trigger these additional fees, credit report checking service Totally Money found.

In its Financial Awareness Survey, it asked 2,000 people how well they understood cash advance fees in a range of situations.

ATM withdrawals

While this is the type of cash advance people are most familiar with, still just under half didn't realise withdrawing cash from an ATM with your credit card would involve a fee.

Gambling

Using a credit card to pay for any type of gambling purchase is likely to trigger a cash advance fee - and you don't have to be in a casino to set it off.

Almost nine in ten people didn't realise there was a cash advance fee when paying an entry fee for a fantasy football team, which is classified as gambling, on a credit card.

Six in seven had no idea a cash advance fee applies when purchasing a lottery ticket, while more than three-quarters didn't realise a deposit on a gambling website would incur a cash advance fee.

Foreign currency

More than six in ten don't know that buying foreign currency using a credit card can mean being charged a cash advance fee, although you may be able to avoid this with specialist travel cards.

'Buying a gift card on credit cost me £60 in fees'

When Sue Baines-MacNeill used her Co-operative Bank credit card to buy a £900 Tui gift card in her home town of Alnwick, Northumberland, her next bank statement came as a shock.

As the Co-operative Bank had treated the transaction as a cash advance, the charges amounted to around £60 in fees and interest.

When we spoke to 30 lenders, most told us that they wouldn't automatically categorise a gift card as a cash advance - but several, including Co-operative Bank, warned that some gift card purchases could be classed differently, depending on the retailer.

Unfortunately for Mrs Baines-MacNeil and others like her, it's very hard to know how these transactions will be classed before buying them.

A Tui spokesperson told us: 'Charges may be applied by a card provider when purchasing a Tui gift card. Our retail staff will inform customers about this and this information is also displayed at the bureau in store.'

After Mrs Baines-MacNeill challenged the Co-operative Bank, it refunded all the charges she'd paid.

What counts as a cash advance on a credit card?

There are some transactions that are routinely treated as cash advances, including withdrawals, money transfers, gambling transactions and purchases of foreign currency or cryptocurrency,

For other transactions, credit card firms rely on categories assigned by retailers, which can result in surprise costs, as Mrs Baines-MacNeil found out.

Credit card firms told Which? it all comes down to the merchant category code (MCC) that's used by the retailer for the transaction. This four-digit number is the code that tells a bank what type of transaction is going through.

So, for example, while you might just be at the casino to eat a meal, paying on your credit card could count as a cash advance because the establishment has a gambling MCC.

Frustratingly, it's not always clear what purchases count as cash advances, so it can be hard to avoid the charges even when you try.

The cost of cash advances on credit cards

Payments classified as a cash advance will trigger a higher rate of interest - up to 26.9% on average, compared to a standard purchase rate of 22%.

Cash advance transactions are usually excluded from any 0%-interest offers. In addition, interest accrues from day one, unlike other purchases, which include a grace period of up to 59 days.

A cash advance fee is also typically charged, either as a percentage of the transaction amount or a flat fee. This could commonly be 3% or £3 per cash transaction u2014 whichever is higher.

This means for small purchases, the fee could be more than the item itself, even before any interest is charged. A lottery ticket costing £2 could incur a £3 cash advance fee - 150% more than the ticket price.

How credit card cash advances impact your credit score

As well as costing you more, using a cash advance could potentially harm your chances of taking out credit in future.

Some credit card companies will report any cash advances to credit reference agencies Experian, Equifax and TransUnion.

Lenders that look at your credit report could see this behaviour as a sign of financial difficulty, which could affect their decision to approve you for a loan.

• Find out more:credit reports explained

How to avoid rip-off fees on cash advances

While you should avoid using your credit card for withdrawing cash, some cards offer more favourable terms than others.

With a 0% money transfer card, you can move part of your balance to your bank account interest-free for a set period, plus a one-off handling fee. Although 0% money transfer deals are rare, some can be found coupled with 0% balance transfer deals.

Alternatively, if you need spending money abroad, you could use a specialist travel credit card. The best will charge no cash withdrawal fees overseas, though they still charge interest, often at a higher rate than other types of transactions on the card.

If you think you've wrongly incurred extra fees and interest for a transaction with a credit card, query it with your provider.

• Find out more: Use our guides on 0% money transfers and travel credit cards to understand how they can help you avoid charges when taking out cash on credit cards.