Most credit cards will allow you to withdraw cash. This is called a cash advance. However, withdrawing money this way is not recommended. This results in high fees and interest charges – which are typically billed from day one.
Let’s take a look at what a cash advance is, how it works, and whether or not you should take one.
What is a credit card cash advance?
A credit card cash advance involves making a cash transaction on 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 to do so.
The main thing to know with a cash advance is that interest is charged from the time you withdraw the money. This is different from when you make a purchase with your credit card.
- Purchases usually have 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 billed at a daily rate and can be costly even if you clear your balance every month.
It’s also important to note that it’s not just ATM withdrawals that are classified as cash advances. The following can also be considered a cash advance:
- Mortgage payments
- Utility bills
- Purchase travel money
- Buy gift certificates
- Transferring money from your credit card to a checking account, also called a money transfer.
How does a cash advance work?
You can take a cash advance by using your credit card at an ATM, showing your ID at your card provider’s branch, or getting a refund when making a purchase at a store.
Your credit card will have a cash advance limit. This amount is usually less than your credit limit for purchases. If you are unsure of your cash advance limit, you can check with your card provider.
What are the costs associated with a cash advance?
There are two costs associated with taking a cash advance:
- Cash advance fees: You will have to pay a fee or a percentage of the amount you withdraw. The amount of this amount can be found in the terms and conditions of your credit card. But it’s usually around 3% or a low of Â£ 3.
- Interest: The amount of interest charged to you will generally be higher than the APR of your card. It will also be charged at the daily rate from the time you make your cash transaction.
It should also be noted that if you are making a cash withdrawal abroad, you will likely have to pay a transaction fee abroad as well. This can be avoided if you have a specific travel credit card that does not incur charges for using your card abroad.
Should I avoid taking one?
As a general rule, 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 damage your credit score.
This leaves a trace on your credit report and signals to future lenders that you may not have enough money in your checking account to cover your needs.
If you end up taking a cash advance, it’s best to pay it back right now. Interest is charged from the time the transaction is made. And since interest rates are usually higher, it can add up very quickly.
There is another way to get hold of a lump sum money without resorting to a cash advance. It is cheaper to use a 0% money transfer card. This type of card will allow you to transfer money from your credit card to your checking account, usually giving you an interest-free period to pay off your balance. However, there is usually a money transfer fee to pay.
If you want to learn more about money transfers, check out our top rated money transfer credit cards.
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