credit cards have a wide variety of uses. In addition to purchases and balance transfers, most credit cards allow you to use them for cash withdrawals, a transaction known as a cash advance.
But how exactly does a cash advance work and what should you watch out for? We tell you everything you need to know.
What is a cash advance credit card?
A cash advance credit card is simply a card that allows you to withdraw money from it. The majority of credit cards offer this feature, but while it can be handy, it can also be an incredibly expensive way to access cash.
Each time you make a cash withdrawal with your credit card, you will be charged a fee. This is often around 3% of the amount you withdraw, but there will also be a minimum charge of around Â£ 3.
This means that even if you only withdraw Â£ 50, which equates to Â£ 1.50 at 3%, you will still be charged the minimum charge of Â£ 3.
In addition to this, you will also be charged interest. But, unlike most credit card transactions which have a “grace period” so interest is not charged immediately, interest on a cash advance will be charged from the day of withdrawal.
This applies even if you pay off your balance in full that month.
Plus, interest rates for cash advances are typically much higher than for purchases, often around 34.9% APR. So overall, it’s an expensive way to get money.
If you use your credit card to withdraw cash abroad, you will be charged an additional fee in addition to the above called a foreign transaction fee. This is typically around 2.99% of the amount withdrawn.
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What transactions are classified as cash advance?
In addition to withdrawing cash, if you use your credit card to do any of the following, these may also be considered a cash advance (depending on the card provider):
- Buy or load money on gift certificates or a prepaid card
- Make a mortgage payment
- Pay a utility bill
- Electronic cash transfers such as transferring money from your credit card to a checking account
- Play or bet
How much money can I withdraw?
If you use your credit card to withdraw funds, you will usually find that the withdrawal limit is a percentage of your overall credit limit on the card.
So, for example, if you have a credit limit of Â£ 3,000, your cash advance limit may be set at 90% of that amount, or Â£ 2,700.
And if you are using an ATM to withdraw your funds, there is usually a daily cash withdrawal limit of around Â£ 300 to Â£ 500. If you want to withdraw more than that, you will need to visit your card provider’s local office and show some ID.
Do cash advances affect my credit rating?
Cash advances will not have a direct impact on your credit score, but they will show up on your credit report.
If you later apply for another form of credit, lenders will check your credit report and may negatively view your use of cash advances, which will affect your chances of getting approved.
When should I use a cash advance?
A cash advance is an incredibly expensive way to get money, and it can affect your chances of getting credit in the future as well. This means that you should avoid using a cash advance whenever possible.
The only time you should consider a cash advance is if you are in desperate need of additional funds and have no other way to access cash. If this is the case, it is essential that you do your research first and understand exactly how much you will be charged.
What should I consider before purchasing a cash advance?
If you need to use a cash advance, first take a look at the following tips:
- Check the interest rate: if you can, look for a card that charges the lowest interest rate on cash advances
- Check the fees: some credit cards do not charge a fee for cash withdrawals. If so, make sure you know how much this will add to your borrowing costs, and don’t forget to check the minimum fees as well.
- Consider bulk withdrawals: it is generally cheaper to withdraw a larger amount of money at one time, rather than making several smaller withdrawals which will each be charged. Just be sure to check the maximum withdrawal limit
- Pay your balance as soon as possible: although you are charged interest from day one, you still need to pay off your balance as soon as possible to ensure you pay as little interest as possible
What are the alternatives ?
Before taking out a cash advance, it is worth considering the alternatives to see if there are more suitable options.
A 0% money transfer credit card, for example, allows you to transfer a lump sum from your credit card to your bank account and use those funds to spend however you want.
You will not have to pay any interest, provided you pay off your balance in full before the 0% offer ends. Note, however, that there will generally be a transfer fee of around 4%.
Alternatively, if you can pay for goods with a credit card rather than cash, a 0% shopping credit card will allow you to spread the cost of your spending interest-free over several months, making it a cheaper way to borrow. But be sure to clear your balance before the 0% offer ends.
Paying for purchases with a credit card also offers you important protection thanks to section 75 of the Consumer Credit Act. This means that if you buy something that costs between Â£ 100 and Â£ 30,000, your card provider and retailer are jointly responsible if the item is faulty or does not arrive.
Finally, you could consider a personal loan that will give you access to a fixed sum of money to repay over a fixed period. The most competitive interest rates are usually for loan amounts of Â£ 7,500 and over, but it’s important to only borrow what you can afford to repay.
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