Most credit cards allow you to withdraw in cash. This is called a cash advance. However, withdrawing money this way is not recommended. This leads to high fees and interest charges – which are usually charged from day one.
Let’s see what a cash advance is, how it works, and whether or not you should withdraw money this way.
What is a credit card cash advance?
A credit card cash advance is a withdrawal of money from your credit card account. You can think of it as a short-term loan from your credit card. Most cards will allow you to withdraw cash up to a certain limit. However, you will end up having to pay high fees and interest charges to do so.
Here are the main features of credit card cash advances:
- You will be charged interest from the time you withdraw the money. Credit card purchases, on the other hand, usually come with a grace period that allows you to avoid paying interest if you pay your balance in full and on time each month.
- Cash advances are charged at a daily rate and can be expensive, even if you pay your balance monthly.
- Cash advances include withdrawing cash from an ATM, paying a mortgage, paying utility bills, and buying travel money.
How does a cash advance work?
You can get a cash advance by using your credit card at an ATM, getting cash back when shopping at a store, paying a bill, or buying cash to travel. The process is the same as when you withdraw money with your debit card, except that a cash advance is much more expensive than withdrawing your own money.
Your credit card will have a cash advance limit. This is usually lower than your credit limit for purchases. If you don’t know what your cash advance limit is, you can check with your card provider.
Are there different types of cash advances?
Types of cash advances include:
- Make mortgage payments
- Pay utility bills
- Purchase of travel money
- Purchase of gift vouchers
- Transfer money from your credit card to a checking account
What are the costs of a cash advance?
There are many costs associated with taking a cash advance, including:
- Cash advance fees: you have to pay a fee or a percentage of the amount you have withdrawn. This is usually around 3% or a minimum of £3, but the exact terms can be found in your provider’s terms and conditions.
- Interest charges: the amount of interest you are charged is usually higher than your card’s APR. You will also be billed at a daily rate from the time you receive your cash advance.
- Overseas cash advance fees: if you withdraw cash abroad, you will often have to pay a foreign transaction fee. This can be avoided if you have a specific travel credit card that does not charge a fee for using your card abroad.
How can you reduce cash advance fees?
You can reduce cash advance fees by paying off your balance as soon as possible. This can be difficult as fees and interest rates are higher on cash advances.
If you have multiple credit card balances, it’s usually a good idea to clear the credit card with the highest interest rate first. If you have good credit, you may also consider transferring your balance to a 0% balance transfer credit card.
What impact does a cash advance have on your credit score?
Taking a cash advance doesn’t directly affect your credit score, but it can affect you in other ways.
Taking out a cash advance on your credit card will increase your credit utilization rate. This can affect your credit score because lenders will see that you are borrowing more.
Since cash advances are expensive, it can be more difficult to pay off your credit card balance. This can put your credit score at risk if you are close to your credit card limit or have a high level of total debt.
Should we avoid taking one?
Generally, it’s best to avoid using your credit card for a cash advance. This can be a very expensive way to use your credit card and can hurt your credit score.
Here are some reasons to avoid taking a cash advance:
- This leaves a mark on your credit report and signals to future lenders that you may not have enough money in your checking account to cover what you need.
- Interest is charged from the moment the transaction is made. And since interest rates are generally higher for cash advances, it can add up very quickly.
- Many lenders use your payments to pay the purchase balance first, before paying the cash advance balance. This can make it difficult to pay off a credit card balance caused by a cash advance.
How to avoid taking a cash advance?
Here are four ways to avoid having to take a cash advance on your credit card:
- Build an emergency fund. This will help you cover unexpected bills or expenses without using a credit card cash advance.
- Make a budget. This will help you control your spending and build up a savings reserve.
- Keep track of your bank balance. You will receive a warning if your funds are low so you can take action if necessary.
- Transfer existing credit card balances. You may be able to apply for a 0% interest card to reduce interest payments and free up cash to pay for purchases.
Taking a cash advance should be a last resort. Check out our best 0% balance transfer cards to find a card that will give you the time you need to reduce your debt and get your finances in order.