What is a Cash Advance Fee on a Credit Card?

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. Fees applicable on cash advances are too steep, and for its late payment, its interest could also be high so it is advisable to have a cash advance as the last option if you are in urgent need of money.

You need to understand cash advance, its fee rates how much limit is permissible via your card, and how actually cash advance frees work for effective finance management. 

What is a Cash Advance?

You can use your credit card not just for purchases but also to access cash through a cash advance when needed. 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.

Why Do Credit Card Companies Charge a Cash Advance Fee?

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 Advance Terms and Fees

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.

How Much is a Cash Advance Fee?

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.

Here is a table showing the total amount of cash advance. Assuming a 5% cash advance fee, with a minimum of Rs.500 and APBR of 29.99%, pay off period is six months:

Should You Opt for a Cash Advance?

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.

How to Avoid Cash Advance Fees?

Before taking out a cash advance, consider other ways you can obtain the cash you need:

• Savings: If you have a savings account, it is better to use this for cash when you have emergencies than to pay cash advance fees and interest. Just top up your savings the moment you are able.

• Payday advance apps: These will allow you to borrow against the money that you receive in your next paycheck, with some charging app fees for access but without interest.

• Buy now, pay later (BNPL) apps: BNPL services enable you to make a purchase and pay for it over time, usually in four equal installments, often without interest.

• Borrowing from friends or family: If you have a close friend or family member, you can request a short-term loan with little to no interest.

• Personal loan: If you have good credit, a personal loan could be a cheaper alternative by having a lower interest rate than a credit card cash advance.

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. 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.