Understanding what cash advance interest rates are
A credit card cash advance gives you quick access to money, but do you know the costs involved?
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If you need money in a hurry, one of the easiest options is to use your credit card to withdraw cash from an ATM. This option comes at a cost: you'll pay a one-off cash advance fee for each transaction, plus interest charges straight away. In this guide, we take you through how interest works on cash advances, the cost of fees and best practices for managing this kind of transaction.
What is a cash advance?
A cash advance is a type of transaction that allows you to access funds in the form of cash or a "cash equivalent". Three common examples are:
- Withdrawing money from an ATM
- Buying gift cards or travel money
If you get a credit card with a promotional balance transfer offer, there's also a good chance that outstanding transferred balances at the end of the introductory period will start attracting the card's cash advance rate. The specific transactions that attract the cash advance rate can vary depending on your credit card, so you should contact your provider or check the product disclosure document for full details. Finder guide has more details about what transactions may be considered as cash advances.
How much do cash advances cost?
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 cash advance fee worth 2-3% of the transaction and are not eligible for features such as interest-free days or reward points.
Sometimes, you will also pay an ATM withdrawal fee, which could be charged by your provider, the ATM operator, or both. There are some credit cards that charge the same interest rate for purchases and cash advances, although the cash advance fee and any ATM fees will still apply.
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 Then, multiply it by the amount withdrawn.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, say you withdrew $500 from an ATM with a card that has a cash advance rate of 21.99% p.a. Let's also say you are charged a 3% cash advance fee of $15. In this scenario, you're not charged an ATM 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 + $15 = $20.42
This means it would cost you $20.42 to borrow $500 for 18 days.
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 to think about before making a cash advance
Cash advances aren't the same as purchases. As well as the fees and interest costs, here are some other key details to keep in mind:
- Cash advance limits. Most credit cards have daily, weekly or monthly cash advance limits in place. For example, you may only be able to withdraw up to $500 a day. Or, you may only be able to access a percentage of your available credit limit for cash advances.
- Repayments. Your credit card provider has to apply your repayments toward the part of your balance that attracts the highest interest first. Since cash advances tend to have higher interest rates than purchases, your repayments will usually go towards reducing your cash advance balance first.
- 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 only apply to purchases. When you use your card for a cash advance, it starts attracting interest straight away.
- Rewards. Cash advance transactions are not considered "eligible" when it comes to earning rewards points or meeting a bonus point spend requirement.
- Introductory 0% p.a. interest rate offers. 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.
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. Using your 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 payday 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.
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. And 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.
Low cash advance credit cards comparison
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