What is a credit card Cash Advance?
Posted by Michael Griffin on May 21st, 2018
A cash advance is when you use your credit card to get a cash loan from a bank or an ATM. It should not be confused with cash withdrawal from a bank or ATM because just like anything else that you use your credit for, this cash has to be paid back. It can be tough used only up to a certain limit. It is very convenient yet expensive.
In simple terms, it is a term where you use your credit card to ‘buy cash’ rather than shopping for goods or using your credit card for some services.
Why are Cash Advances expensive?
If you are looking to get a Cash Advance, it is definitely easy but very expensive. Here is a rundown on the various reasons that make it so expensive.
- Cash Advance Fees:
A Cash advance is charged a cash advance fee. It might be a flat rate or a percentage of the amount of cash advance borrowed by you depending on the credit card terms. For instance, it might be or 5% of the cash advance, mostly depending whichever is a higher fee.
- ATM Fees:
An ATM fee is charged in addition to a Cash advance fee. It is charged depending on the bank that handles your finances or the ATM Placement Company who provides you the cash advance. It is usually, between to .
The interest on cash advances mount up very quickly. This is because the interest on cash advances is much higher than the usual interest that you use your credit card normally, for purchasing goods. For example, your interest on a 0 cash advance is much higher than the interest on a 0 shopping using the same credit card. The time taken to pay back the cash advance is directly proportional to the interest build up.
- No grace period:
Most of the credit cards do not provide you with the luxury to pay a full billing cycle such as to avoid a financial charge. The interest keeps on adding from the day you take the cash advance to the day you pay it off. It is better not to wait until the day the bill comes to pay off the balance. Rather pay it as soon as possible.
- Allocation rule for payments:
When the cash advance exceeds the minimum payment to balances, the credit card issuers can apply any interest at their will. The Federal Law allows applying only a minimum payment to balances with the highest interest rate. As paying longer, means paying a higher interest rate, so you will often come across the payments above the minimum payment requiring the lowest interest rate.
So, how to avoid taking a Cash advance?
The most preferred option would be stay out of cash advances. However, in case of emergencies when you are short of funds, consider all you options and opt for a cash advance.
- Monitor your balance:
Track your balance before opting for a cash advance. Set up mobile alerts to warn you when your balance drops the minimum amount set by you.
- Purchase with your credit card:
If at all, you have to apply for a cash advance, first consider making a purchase with your credit card because the interest is lesser than the interest incurred by a cash advance.
- Keep an emergency fund:
Often you will come across situations where you need to pay for things that aren’t predicted. So, keep an emergency fund handy so that you do not need to rely on your credit card every time such a situation occurs.
Make sure you know the limits of your credit card and are aware of all the interests that come along. Remember, that there is no grace period, so pay it off as soon as possible and do not make cash advance a habit.