Your credit card can give you quick access to money through a cash advance, but do you know of all the costs involved in taking one?
Your credit card can be a great way to make purchases when you don’t have the money to pay upfront and need the funds in a hurry. Most credit cards allow cardholders to withdraw funds up to a particular limit, which they refer to as cash advances. Just how you use this money is completely your prerogative, but there are certain aspects you should take into consideration before you use your credit card for a cash advance. Taking one, after all, comes with its share of costs, which can increase considerably over time.
What is a cash advance?
A number of Australians use their credit cards for cash advances, mainly because this gives them quick and easy access to money during different kinds of emergencies. Put simply, you can think of a cash advance as taking a loan from your credit card issuer. You can access this money using an ATM or by visiting a branch, depending on your convenience.
What you have to remember is that the interest a cash advance attracts is typically higher than a card’s interest rate on purchases, and cash advance rates of Australian credit cards typically hover around the 20% mark. This can be a problem for many credit card users, because they aren’t aware that there are transactions beyond getting cash from ATMs that qualify as cash advances.
What else is classified as a cash advance?
Using your credit card to withdraw money from an ATM or a branch clearly qualifies as a cash advance, and to the surprise of many, so do the following:
- Getting cash out at grocery stores
- Using a non-BPAY registered billing service to pay bills
- Purchasing foreign currency or travellers cheques
- Transacting at physical or online casinos, which can include money spent on food and beverage
- Transferring funds from your credit card account to any other bank account
- Cashing in blank cheques sent by your credit card issuer
- Outstanding balances from balance transfers at the end of promotional interest rate periods can attract the card’s cash advance rate
Why do banks charge higher interest rates for cash advances?
Credit card issuers tend to publish their cash advance rates and fees as part of the fine print because these are often on the higher side. Card issuers tend to charge higher cash advance rates when compared to purchase rates, because in their opinion cash advances present higher risks. While cardholders can use cash advances at any time, responsible credit card issuers recommend that you use this feature in emergencies only.
What is the best way to use a cash advance?
There is no telling when you might need money in a rush, and as much as you’d like to avoid it, you might have to use your credit card for a cash advance. If you do, paying attention to the following can help:
- Avoid ATMs. Using an ATM to get a cash advance can involve paying an ATM fee. You can avoid this fee by using your credit card to transfer money into your bank account, over the phone or online. If you have to use an ATM, try using your own bank’s ATM or one that is part of its ATM partner network.
- Withdraw money from a teller. Withdrawing money in person, by visiting any of your bank’s branches, gives you the ability to avoid additional ATM fees.
- Use cheques. If you have cheques linked to your credit card account, using them for cash advances is another way to avoid ATM fees.
- Low rate credit card. If you foresee yourself turning to cash advances in the future, consider getting a low rate card that charges a low rate on purchases as well as cash advances.
Cash advances and credit card reforms
Certain credit card reforms made in 2012 worked in the favour of cardholders with respect to cash advances. Before this period, card issuers applied payments that cardholders made to transactions with the lowest interest first, which allowed them to keep charging high interest on cash advances for the longest possible period. With the reforms in place, any payment you make towards your credit card account now goes towards high interest transactions first.
The reforms require credit card companies to limit how much cardholders can exceed their credit limits by, so you know you won’t go way over the top. What also helps is card issuers can no longer increase your card’s credit limit without your approval.
What should I be wary of when using a cash advance?
Using your credit card for a cash advance should be a last resort, and if you do end up taking this path, remember the following.
- Paying high interest. The cash advance rate of your card, almost certainly, is higher than its purchase rate. What you should also know is that cash advances start attracting interest from day one, and interest-free days never apply on cash advances. You should, as a result, try to repay the borrowed amount as soon as possible.
- Cash advances overseas. Using your credit card for cash advances overseas is possible and best avoided. This is because you would have to pay international transaction fees and you could also have to pay ATM fees.
- Cash advance fee. The money you borrow through a cash advance attracts interest, and certain card issuers require that you pay an additional cash advance fee. This fee can vary from one card to the next, thereby requiring your attention.
Alternatives to cash advances
There are alternatives to cash advances, and just which one you can turn to depends on your financial situation and the urgency of your requirement.
- Use your debit card. Using your debit card to withdraw money from your bank account normally does not attract any fees, especially if you stick to your own bank’s or a partner bank’s ATM. You don’t have to pay any interest either. In such a scenario, you can still use your credit card to pay bills via BPAY and for everyday purchases.
- Get a loan. If you have some time on your hands you can consider getting a payday or a personal loan, both of which tend to charge lower interest when compared to cash advances. Some payday loan issuers can give you access to approved funds on the same day or by the next business day.
Cash advances can prove to be beneficial when you need money in a hurry and have no other option, but if you can avoid it, it’s best that you do. Remember at all times that cash advances have high costs associated with them, and the longer you take to repay a cash advance, more you will have to pay in the form of interest. If you plan to turn to cash advances, it’s in your best interest to look for a card that does not charge an exorbitant cash advance rate, and comparing your options is the ideal starting point.Back to top
Frequently Asked Questions
I have a new credit card that comes with a six months 0% p.a. interest rate offer. Does this apply on cash advances?
The possibility of this is slim, and it’s best that you go through your credit card’s terms and conditions or speak to a customer service representative to confirm the same.
I have a $1,000 debt on my credit card because of a cash advance. Can I transfer this balance to a new card?
This is possible, but you would have to qualify for a new card that comes with a balance transfer offer.
How much do I have to pay as cash advance fees?
Cash advance fees vary from one card issuer to the next. It can be a percentage of the cash advance or a fixed amount.