While credit cards are designed to pay for purchases, you can also use them to get cash or a cash equivalent. Known as a cash advance, these transactions generally attract higher rates and fees when compared to regular purchases. So it’s important to consider whether the convenience of using a credit card for cash advances is worth it.
A cash advance is a type of transaction that allows you to access funds in the form of cash or a “cash equivalent”. For example, using your credit card to withdraw money from an ATM, pay for gift cards or buy foreign currency are all commonly defined as cash advance transactions.
Cash advances typically have higher interest rates than standard credit card purchases, with most ranging from 19% p.a. to 22% p.a. They also attract a fee worth 2-3% of the transaction and are not eligible for features such as interest-free days or reward points. There are some credit cards that charge the same interest rate for purchases and cash advances, although the cash advance fee still applies.
How to calculate cash advance charges
First, divide the cash advance interest rate by 365 (number of days in a year). Then, multiply it by the amount withdrawn. Finally, multiply that number by the number of days from the transaction to the date it is paid (since cash advances start to accrue interest immediately). If your card charges a cash advance fee, you should add this to your final number to get the total cost of your cash advance.
As an example, you take $500 in notes out of an ATM, the cash advance rate is 21.99 percent, you pay the full amount back in 18 days and you are charged with a $4 cash advance fee.
21.99 percent / 365 days = 0.06024
0.06024 x $500 = 30.12
30.12 x 18 days = $542.22
$542.22 /100 percent = $5.42
$5.42 + $4 = $9.42
Meaning you will pay $9.42 to borrow $500 for 18 days.
What transactions are classified as a cash advance?
Using your credit card to withdraw money from an ATM, bank branch or at the checkout clearly qualifies as a cash advance. Other transactions considered as "cash advances" may vary depending on your issuer, but could include:
Buying foreign currency or traveller's cheques
Gift card or prepaid debit card purchases and top-ups
Using a non-BPAY registered billing service to pay bills
Utility and government charges
Transactions at physical or online casinos (which can include money spent on food and beverages)
Other gambling transactions, such as buying lottery tickets or scratchies
Transferring funds from your credit card account to any other bank account
For a full list of what your credit card issuer considers a cash advance and the charges that will you'll incur, please see your card's Product Disclosure Statement.
Why do banks charge higher interest rates for cash advances?
Cash advances are similar to short-term loans in that they provide you with funds on short notice. The cash you get can then be used for anything you want, including transactions you wouldn't normally be able to use a credit card for (such as paying other debts). As such, these transactions are considered as being a greater risk than standard credit card purchases.
A higher standard interest rate can help lenders offset this risk by providing them with more potential profits when you use your card for a cash advance. The rates and fees applied can also help deter you from regularly using a credit card for cash advance transactions, which also reduces the potential risk for lenders.
What fees and charges apply when using a credit card for 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.
Cash advance fees. These are usually charged as a percentage of the total cash advance amount. For example, if you withdrew $1,000 on a credit card with a cash advance fee of 3%, you would pay a fee of $30. This fee will add to the balance on your card and increase your interest charges.
Interest charges. Interest applies from the day you make the cash advance transaction. For example, if your credit card had a cash advance rate of 21.99% p.a. and you made a cash advance transaction worth $1,030 (with a 3% cash advance fee), you would be charged $18.64 for the first month you carried this debt. If you only paid the minimum off it each month, it would take you around 9 years to pay it off and cost a total of $1,274 in interest.
ATM fees. Some providers and third-party companies will charge an additional fee when you withdraw money from an ATM outside your provider's network. These charges will add to the overall cost of your cash advance. You may be able to avoid these fees by using an ATM that's part of your provider's network.
Cash advances overseas. If you use a credit card for a cash advance overseas, you could attract other charges, including ATM fees and currency conversion fees. These will be added to the total cost of the cash advance, leading to even higher interest charges.
Cash advances and credit card repayments
Following the credit card reforms in 2012, banks have to allocate your repayments to the debt that is accruing the highest interest first. So if you've used your card for both purchases (which might accrue interest at 14%) and cash advances (which collect 22% interest), your repayments will go directly to your cash advances. If you're trying to repay your purchases without collecting interest, it's important to remember this and where your repayments are actually going.
What are the alternatives to cash advances?
If you want to avoid the extra fees and high-interest rates that come with using your credit card for a cash advance, you can consider the following alternatives:
Debit cards. Usingyour debit card to withdraw money from your bank account won't attract cash advance fees. In fact, it's likely to be fee-free if you stick to your own bank’s ATM network.
Direct bank transfers. If you need to make a payment straight away, you could consider a direct transfer from your bank account. This allows you to pay anyone using your own money instead of funds from your credit card, which means you won't be charged interest or a cash advance fee.
Loans. If you need extra funds, you may also want to consider getting a short-term loan or a personal loan to cover the costs. These options could have lower interest rates than credit card cash advances. Plus, some short-term loan issuers can give you access to approved funds on the same day or by the next business day.
Cash advances can be convenient when you need money in a hurry and have no other option, but the rates and fees they attract mean that cash advances should only be considered as a last resort. If you still think you may use your credit card for a cash advance, you may want to compare credit cards with low cash advance rates to see if there is an option that will work for you.
Frequently asked questions about credit card cash advances
Most 0% interest offers apply to standard purchases or balance transfers, so cash advance transactions are generally not eligible for the promotional rate of interest.
Yes, you can transfer this debt to a balance transfer credit card and take advantage of an introductory interest rate, providing you meet the card's eligibility requirements and are approved by the issuer.
Cash advance fees vary from one card issuer to the next. It is usually represented as a dollar amount (ie. $2-$3) or around 2-3% of the transaction, whichever is greater.
Amy is an editor and writer at finder.com.au with more than 10 years experience covering credit cards, personal finance and various lifestyle topics. When she’s not sharing her knowledge on money matters, Amy spends her time as an actress.
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