A cash advance can give you quick and easy access to money, but do you know the costs involved?
If you need money in a hurry, one of the easiest options is to use your credit card to withdraw notes from an ATM. This convenience comes at a hefty price, and it’s in your best interest to repay the debt as soon as possible to avoid the burden of compound interest. Read this quick guide to find out how interest works on cash advances and best practices for managing this kind of transaction.
What is a cash advance?
Credit card providers tend to charge different interest rates for purchases and cash advances, and the following transactions qualify as cash advances:
- Cash withdrawals. You can use your credit card to withdraw cash from an ATM, at a branch, or as cash out via EFTPOS, and your card provider will consider all such transactions as cash advances. This includes buying foreign currency or traveller's cheques as well.
- Gift cards and prepaid cards. As the money you load onto a gift card or prepaid card is equivalent to cash, these transactions are usually considered as cash advances when you pay with a credit card.
- Gambling. If you use your credit card to pay for gambling transactions, prepare to pay your card’s cash advance rate. The cash advance rate can also apply on expenses incurred in paying for food and beverage in gambling establishments.
- Unpaid balance transfer debt. If you get a credit card with a promotional balance transfer offer, there’s a good chance that outstanding transferred balances at the end of the introductory period will start attracting the card’s cash advance rate. Learn more about balance transfer rates.
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 Then, multiply it by the amount withdrawn.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
This means you will pay $9.42 to borrow $500 for 18 days.
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What to consider before making a cash advance
Cash advances aren't the same as purchases. If you’re planning to use your card for a cash advance, here’s what you need to know:
- Minimum withdrawals. While you can use your credit card to pay for the smallest possible purchases, when it comes to withdrawing cash you may have to deal with a minimum withdrawal amount of $20 or more.
- Maximum limits. If you think you can use your credit card to withdraw cash up to your card’s available credit limit, think again. It is not uncommon for credit cards to have daily, weekly, and monthly cash advance limits in place. Maximum daily cash advance limits of less than $500 are rather common.
- Cash advances paid first. Your credit card provider applies your payments toward balances that attract the highest interest. Since cash advances tend to attract higher interest than purchases, you can be certain that your repayments will go towards reducing your cash advance balance first.
- High interest rate. Interest for cash advances is normally 20% p.a. or more, which is considerably higher than the purchase rate of around 13% p.a. that some low rate credit cards charge. This makes cash advances a rather expensive form of credit, and if you’re not in a hurry, getting a personal loan might be a better option.
- No interest-free days. Most credit cards give cardholders the ability to make use of interest-free days if they pay their closing balances in full each month. These interest-free days apply only on purchases, and not on cash advances. When you use your card for a cash advance, it starts attracting interest from the word go.
- Cash advance fees. In addition to paying a high cash advance rate, you could also have to pay a cash advance fee, which typically varies in between 1.5% to 4% or a flat fee of $2 - $4.
- Ineligible transaction. Cash advance transactions are not considered "eligible" when it comes to earning rewards points or meeting a minimum spend requirement.
While credit card cash advances can give you quick access to cash, the costs involved usually outweigh the benefits. Make sure you understand what is considered a cash advance and the interest rates and fees that apply to weigh up whether it's worth it.