What is a Credit Card Cash Advance

by John_S on January 16, 2011

A credit card cash advance is a sum of money that can be withdrawn by a credit card user by simply swiping the card at an automatic banking machine (ATM). Like any other ATM card, the credit card is accessed by entering a PIN, provided by the financial company. Many consumers advice against the use of this feature as there are heaps of charges involved in the process.

How Much Money Can Be Withdrawn as Cash Advance

The sum will depend on the credit card company but certainly, it is based on a percentage of the credit limit. On the other hand, the latter will be based on the card holder’s credit ranking and other factors. Usually, the amount allowed for cash advances is pointed in the credit statement.

Interest Rates

Compared to regular purchases, cash advances are charged higher interest rates. This requirement is obviously not to the customer’s advantage as credit card companies often use the monthly payments to repay balances with low interest rates before moving on to balances with higher interest rates. This means that the cash advance will only be covered if other balances are paid in full. In other words, it will not stop accruing interest until the total amount of the cash advance is paid off.

Grace Period

There is no grace period for cash advances. That’s why they start accruing interest the moment they are made. As soon as the money is withdrawn, the cash advance begins to accumulate debt. In addition, other fees may apply. The ABM may charge a fee, for example, when the cash is withdrawn, thus adding up to the total amount you pay.

When to Use Cash Advance

A cash advance should only be used as a last resort if other options have been exhausted.  Taking cash advance may be necessary if you cannot borrow money from a relative or a bank, and you have an emergency (e.g. medical bills to pay). Alternatives to cash advances are: payday advance from your boss, due date extension from your crediting institution, small loan from your credit union or bank, local emergency hardship program (these are usually offered by human resource departments), and consumer credit counseling. In addition, you might consider doing a side job or working overtime and selling items you don’t need. Decreasing your monthly expenses and cutting out on some of your utility bills is another alternative to consider. Remember that the interest rate is substantially higher and using a cash advance for making ordinary purchases is one of the quickest ways to getting in debt.

Other Considerations

Given that balances with low interest rates are covered first, use a credit card that has a zero balance to make cash advances. In this way, you will lower the chances of accruing more interest as monthly payments will instantly apply to the cash advance. In addition, avoid making other purchases until you pay the cash advance in full. Since newly purchased items have to be repaid first, the cash advance balance will remain unpaid until all other items are fully paid.

Cash advance may seem like a good solution to an emergency situation, and they are definitely a better alternative to payday loans. However, you should check if your credit limit is not less than the cash advance limit. In this case, you will pay higher interest and overage charges.

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