Drawbacks Of Cash Advance Through Credit Cards

Posted by Nick Niesen on October 29th, 2010

Though the cash advance facility offered by credit card companies is a convenient way of getting immediate cash at times of financial crisis, it should be avoided as far as possible. The consumers should realize that cash advances are accompanied by high rate of interest and fees. In addition, there are no grace periods provided for cash advances. Moreover, for consumers who seek debt relief, cash advance could add fuel to the fire. It would be better to be aware of the following points before going ahead for a cash advance through your credit card.

Though the fees for cash advance could vary, it is generally high. Two methods of calculations are used for deciding the fee amount. Mostly it is calculated on a percentage basis, say 1% to 4%. Other card issuers directly ask for ?flat fees? for their cash advances and it is generally constant not based on the amount of advance. Another common trend is to combine both methods of calculation. This is sure to result in higher fees. For example, an issuer could charge x% for cash advance, but charges a minimum $10 irrespective of the amount of advance taken. Another case could be an issuer who charges x% or $20 whichever is higher. In such a case, one should read the credit card agreement carefully before proceeding.

Another point to be noted is to avoid usage of ATM machines for a cash advance. ATMs generally charge extra fee for a cash advance. This fee goes to the financial institution to which that particular ATM belongs. The greatest loophole of a Cash advance is the interest charges. The rate of interest charged for a cash advance through credit card is normally several times higher than the interest rate for day-to-day purchase made through your credit cards. Another possible drawback of a cash advance through credit card is the grace period and the mode of payment by the card issuer. A cash advance does not involve any grace period, as it begins accumulating interest almost immediately on withdrawal of the amount. Hence even if your credit card payment is completed, you may stilled be billed some finance charges for a cash advance. Finally, most card issuers apply the process of payment of card purchases before payment to cash advance. In case such a balance is carried in a credit card, it could result in a high net interest rate.

Cardholders could get easily get tempted through cash advance offers without realizing the serious implications that it could later on leave on them.