Short on cash? Read this before you get a cash advance

If you’re low on cash, you might be tempted to get a cash advance using your credit card. This might seem like a quick and easy way to get money, but in reality, cash advances can be quite costly.

What is a cash advance?

A cash advance is when you withdraw money from your credit card account. For example, if you take out cash from an ATM using your credit card or if you transfer money from your credit card account into your transaction account.

Cash-like transactions using a credit card, such as spending on gambling (including buying a lotto ticket), money transfers and buying travellers’ cheques, are also commonly classified as cash advances. Each provider will have its own rules around this, so it’s important to read the terms and conditions to confirm what types of transactions your provider considers to be a cash advance.

Cash advance cost
Source: kikovic (Shutterstock).

How much does a cash advance cost?

Each time you make a cash advance, you will be charged a one-off cash advance fee. On top of this, you will also be charged interest on the cash advance.

Interest charges on cash advances

Cash advances typically attract interest from the date of the transaction until you pay off the cash advance balance in full. This is different to purchases made using your credit card, where you will usually receive an interest-free period (e.g. up to 55 interest-free days).

You may also pay more in interest for a cash advance compared to a purchase. At the time of writing, the average cash advance rate for personal credit cards in Canstar’s database is 19.29%. In contrast, the average purchase rate for personal cards is 16.91%.

Interest on cash advances is typically charged on a daily basis and will be based on your outstanding cash advance balance. This means you’ll also be charged interest on any unpaid interest that has been added to your balance, as well as any fees and charges.

Cash advance fee

In addition to interest charges, you will also typically be charged a cash advance fee. This is usually a percentage of the cash advance amount or a flat fee – whichever is greater. For example, the average cash advance fee in Canstar’s database is currently $3. At the time of writing, 78% of personal credit cards on our database charge a cash advance fee, with the highest flat fee being $5.

The cash advance fee is charged at the time of the transaction and is added to your cash advance balance. This means that you’ll be charged interest on it.

In addition to the cash advance fee and interest, you may also be charged an ATM fee if you are withdrawing cash from another bank’s ATM.

How do I avoid cash advance fees?

One of the best ways to avoid cash advance fees may be to not use them altogether. Before making a cash advance, consider whether you could use your debit card instead, or whether you have the option of making the transaction as a purchase with a retailer.

If you can’t avoid making a cash advance, you can minimise the interest paid (and potentially the cash advance fee if it’s calculated as a percentage) by reducing the amount of money you withdraw. You’ll be charged interest from the moment you make the cash advance, so paying the balance back quickly can also help to reduce the overall cost.

Choosing a credit card with a low cash advance rate is another way to minimise interest costs. For example, at the time of writing, the highest cash advance rate in our database is 25.99%. In contrast, the lowest cash advance rate in our database is 8.20%.

However, it’s important to take more than this rate into account if you are looking to take out a credit card. Other factors such as the annual fee, purchase rate and additional features such as rewards points could also be worth considering. Canstar compares different types of credit cards based on these factors and more. Find out which credit cards received a 5-Star Rating in 2020.

If you’re looking for ways to help manage your finances, you might want to check out our tips on how to create a budget or try our budget planner calculator.

This article was reviewed by our Sub-Editor Jacqueline Belesky and Finance Editor Sean Callery before it was published, as part of our fact-checking process.

Main image source: Milleflore Images (Shutterstock). 

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