It’s a fast way to access extra money but taking a credit card cash advance is costly and rarely (if ever!) a good idea. We step you through how fees, interest, and repayments work when you borrow cash from your card.
What is a credit card cash advance?
When you withdraw cash from your credit card it’s known as a cash advance.
This doesn’t just mean taking cash out at an ATM from your credit card, though. Credit providers consider other transactions “cash” too.
Cash advances are considered:
• Taking cash out at ATMs or bank branches.
• Transferring money from your credit card to a transaction account.
• Making a money transfer, purchasing a lottery ticket or gambling.
• Buying travellers cheques. Not so common these days but still possible!
Check the terms and conditions of your card to see what your credit provider considers a cash advance.
Most lenders will also cap the amount you can access in a cash advance. So, if you have a $2,500 available limit, it doesn’t mean you’d be able to withdraw the entire amount in cash. The maximum might be a few hundred dollars.
The real cost of a cash advance
Think a cash advance is the same as any other purchases on your card? Think again.
Cash advances are treated very differently with interest and fees. This is how you can get stung with an unexpectedly high balance, especially if you make a habit of relying on cash advances.
No interest-free period
With regular credit card purchases, you have until the next billing cycle to pay off the amount before incurring interest.
Let’s say you charge $200 of groceries to your card. If you repay the full $200 before your next bill is due, you won’t pay extra in interest. Simple!
On the other hand, if you take a $200 credit card cash advance from the ATM the interest kicks in straight away. There’s no interest-free period.
Interest is charged on a daily basis and added to the outstanding balance. This compound effect increases what you owe very quickly and can make it tricky to keep on top of things.
The interest rate for using a credit card cash advance is usually higher too. For example, your regular transitions might incur 18% p.a. interest while a cash advance is charged at 22% p.a.
Cash advance fee
You’ll also be hit with a cash advance fee. In most cases, you’ll either be charged a flat fee or a percentage of the cash advance amount.
For example, a $250 cash advance with a 5% fee will cost you $12.50 while flat fees are usually between $5.00 - $8.00.
This fee is added to your outstanding balance, so you’ll be charged interest on it too.
Paying off a cash advance is more complicated
Using a cash advance can make managing what you owe more confusing.
When you use your card for cash advances and regular purchases it affects how you pay off your credit card balance. Repayments aren’t simply split evenly across the outstanding balance of both types of transactions.
The amount you pay off your card is applied to your cash advance balance first because it has a higher interest rate.
This means if you’re just making the minimum payment, it’s only being applied to the cash advance - not the regular transactions with the lowest interest rate.
This means the amount of debt you’ve incurred for regular purchases isn’t getting any smaller and interest continues to stack up.
For example, let’s say you had an outstanding balance of $400 on your card:
$300 is for regular purchases and $100 is a cash advance.
If the minimum repayment is $25 per month, that $25 is usually only applied to the $100. The debt for your regular purchases continues to grow with interest.
Mixing balances with different interest rates, especially if you can only afford the minimum repayment, will keep you stuck in debt for longer.
Understanding how interest rates and repayment allocation works is key to making a wise decision whether to use a cash advance.
Are cash advances a good idea?
The truth is, cash advances are rarely a good idea. If you need fast money, they’re a costly option and the outstanding balance, even a modest one, can quickly spiral.
A cash advance really should be the last resort in an emergency and not used for non-essentials like new shoes or extra holiday spending money.
Consider other less costly options first like taking a temporary overdraft from your bank or even borrowing the money from family or friends.
If you’re really stuck and a cash advance is the only option, do your best to repay the full balance as quickly as possible.
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