When to Use a Cash Advance
Monday, December 22nd, 2008 at 8:25 am
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While a credit card will pay for most things these days there are always times that call for good old fashioned cash. Most of the time you would probably access cash from an ATM using a cash card linked directly to your bank account. However, if your bank account funds are running low or the ATM in the location you are in won’t accept your card then an option to access cash might be using your credit card to get a cash advance via an ATM machine. Some banks even offer credit card checks which can be used to pay for items but are treated like a cash advance, not a normal credit card purchase.
Should you be concerned about that?
There’s no question about it, credit card cash advances can act as a very valuable feature. Any traveler who finds himself or herself wanting for cash in a foreign country will really appreciate the relief it gives. Your credit card allows you to get a cash advance anywhere around the world, from locations as convenient as the ubiquitous ATM machine.
Before you start making credit card cash advances there are things you need to know. Typically, cash advances are going to be more expensive to you than making the purchase directly on your credit card. Consider the following:
Finance charge: There are cards that bend the rules but you will find a cash advance with most cards attract a higher APR than purchase rates. This is very typical even with low interest credit cards. For example, a low interest credit card from an Australian bank has a cash advance rate of 18.75 percent (as at March 12, 2008), while the purchase rate is 12.99 percent. Be aware that the difference in interest rates can be very significant.
There is a reason for this. The credit card issuer earns some income from your purchases because merchants pay fees to process and receive payments for the transactions. A merchant is not involved in a cash advance transaction, so the credit card issuer does not earn fees.
Grace period: Credit card issuers normally grant a grace period on purchases, and charge interest on these only if you don’t pay off the amount when it falls due. A cash advance does not get such grace period, and interest is charged from day one. A $500 credit card purchase could cost nothing in interest if you paid the bill in full on its due date; a $500 cash advance at 18 percent APR paid in full after one month would require you to pay $7.50 interest.
Special fee: Card issuers often charge a cash advance transaction fee, shown as a percentage of the cash advance made. Usually, the fee ranges from 2 to 3 percent, but with a minimum fee (e.g. $10). In the example above, you would pay $10-$15 (2-3 percent) as transaction fee on the $500 cash advance.
In the examples above, the $500 credit purchase would not cost anything in interest or fees, but the $500 cash advance would cost a total of $17.50-$22.50.
That is the bottom line: credit card cash advances are more expensive than credit purchases. The message is that cash advances should be used judiciously and only in emergency situations.
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