Credit card companies impose a cash advance fee when you use your card to withdraw cash rather than make a purchase. This fee usually ranges from 3% to 5% of the cash advance amount.
Here, we will discuss all you need to know about cash advances, the fee, and why the charges are so steep.
When you withdraw money from your credit card, the credit card issuer is essentially lending you money, and you are being charged interest for it. Cash advances are charged from the day you borrow the funds. Once you borrow it, the amount, the fees, and the interest get added to your account, and you have to pay it while paying your credit card bill.
Withdrawing money from your credit card is not the same as withdrawing from your credit card. In the case of your debit card, you are withdrawing your funds from your bank account.
Depending on your credit card issuer, you might be able to get a cash advance in person at a bank or credit union, at an ATM, over the phone, or by cashing convenience checks provided by your card issuer. Typically, the limit for cash advance fees on a credit card is lower than your card’s total credit limit.
A cash advance fee is charged for making a cash advance. But other types of transactions might also be considered a cash advance, although you won't be taking the cash outright. Your credit card company may, for instance, impose a cash advance fee on you under these circumstances:
Transferring money through peer-to-peer apps like Google Pay or Paytm
Making loan repayments
Making a wire transfer
Buying traveler's cheques
Buying money orders
Purchase lottery tickets or gambling
Currency conversion
Cash advances can get money into your pocket in a short time, but they don’t come without some associated expenses. Some of these expenses are discussed below:
Cash advance APR: The rate on cash advances tends to be much higher than for purchases.
Cash advance fee: A percentage of the amount drawn down- typically within a band from 3% to 5%.
Bank fee: Some banks slap an additional fee for cash drawn in person.
ATM Charge: The card issuer or the ATM operator may charge you a fee if you draw cash from an ATM.
Cash advances are somewhat expensive due to the factors mentioned in the previous section.
Typically, the cash advance fee on credit cards ranges between 3% to 5% of the amount or is Rs.500, whichever is higher. Interest on cash advances typically begins to accrue immediately without the benefit of a grace period.
| Cash Advance Amount | Fee | Monthly Payment | Interest | Total Cost |
|---|---|---|---|---|
| Rs.10,000 | Rs.500 | Rs.1,997 | Rs.982 | Rs.11,982 |
| Rs.50,000 | Rs.2,500 | Rs.9,531 | Rs.4,687 | Rs.57,186 |
| Rs.1,00,000 | Rs.5,000 | Rs.19,062 | Rs.9,373 | Rs.1,14,372 |
| Rs.2,00,000 | Rs.10,000 | Rs.38,124 | Rs.18,747 | Rs.2,28,744 |
A cash advance is an enticing option when you have to secure cash in a short time. However, it can be a bad way out in most cases and only wise if the amount is small and can be repaid in a short period. Due to its steep advanced fees, and high interest rates, and lack of cash withdrawal limit, it is not an effective method to secure funds for your immediate needs.
If you require more money or it is a long time before it is repaid, then you would be better off looking at other options. Cash advances have very high interest rates and fees that build up pretty quickly.
Cash advance fees can be reduced if you follow these tips -
Find out how your bank or credit card issuer calculates the cash advance fees. If it is a percentage of the amount you borrow, only borrow what you need. That way, the fee you will have to pay will be low.
However, some banks charge a flat fee for every transaction. In such a case, withdraw the required amount in one go to reduce the fee you have to pay.
Like other purchases made on a credit card, cash advances do not have a grace period. The interest is charged right from the day you borrow the amount. If you plan it in such a way that you can pay it off within a few days or weeks of borrowing it, you will have to pay a lesser amount as interest.
The cash advance fee depends completely on the credit card’s terms and conditions. Some cards may have lower interest rates and higher limits on cash advances than others. So, if you tend to use cash advances a lot, choose a credit card that has better terms for it.
No matter how careful you are about reducing cash advance fees, they are still higher than most transactions. Thus, you are advised to avoid taking cash advances at all.
Before taking out a cash advance, consider other ways you can obtain the cash you need. Some ways are listed here -
Use your credit card to make purchases instead of taking a cash advance.
Build an emergency fund to help you in times of need.
Borrow money from family or friends to avoid hefty interest charges.
If you have good credit, consider taking a personal loan.
Monitor your balance so you know when you might need money and you can plan ahead.
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A cash advance can provide quick access to cash, but the fees and high interest rates make it a costly option if not repaid quickly.
Due to its steep advanced fees, high interest rates, and lack of cash withdrawal limit, it is not an effective method to secure funds for your immediate needs. Before taking a cash advance, it's wise to explore alternatives, many of which are more affordable and may not require a credit check.
If you determine that a financing option requiring a hard credit check is your best choice, you can regularly monitor your credit score to ensure you get the best terms possible.
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This article is for informational purposes only and does not constitute financial or legal advice. Always consult with your financial advisor for specific guidance.
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