When you are in need of money that you do not have, you may not always pause to consider the best approach to get it. If you are in desperate need, you may take out a cash advance on a credit card, for example, without thinking about the cash advance interest or how you would return it. Here’s an explanation of how cash advance interest works and how to reduce it.
- Cash advances are treated differently by credit card providers than typical credit card transactions.
- Cash advances are subject to fees levied by credit card providers.
- Using a credit card for cash may result in a different interest rate than using it as a credit card.)
- Cash advance interest on a credit card is calculated from the transaction date, not the end of the grace period.
- Before taking out a cash advance, consumers should read the conditions carefully.
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What Is a Cash Advance Using a Credit Card?
A cash advance is a quick method to get cash using your credit card. It’s similar to a payday loan, only the funds are advanced against your card’s line of credit rather than your income. In some ways, a cash advance is similar to any other credit card transaction, except that instead of purchasing things or services, you are “purchasing” cash. 1
What many individuals don’t realize about cash advances is that they are handled differently than credit on purchases by your credit card. Taking out a cash advance is not the same as using your credit card to purchase goods or services.
The cash advance interest rate may be greater, and there may be a transaction charge. A cash advance may still make sense when compared to other methods of obtaining a rapid loan, such as a payday loan, which must be repaid, often by your next paycheck.
How to Get a Cash Advance from a Credit Card
A cash advance may be obtained by visiting an ATM, bank, or other financial institution, or by requesting a check from the credit card provider. In fact, several card issuers send checks in the mail on a regular basis to tempt customers to request a cash advance on their cards. Check your credit card conditions to determine your cash advance limit and the amount of credit available for a cash advance. 2
What may go wrong if your credit card company offers you to obtain a cash advance? You’ve probably already figured out the general answer to that query. However, the devil is in the details, and you must thoroughly grasp what you’re getting into before taking advantage of your cash advance choice.
Credit Card Cash Advances vs. Regular Purchases
Credit card firms enjoy cash advances because the interest on them is treated differently from interest on card purchases. Credit card purchases and cash advances are referred to differently. For one thing, the interest rate on a cash advance is sometimes several percentage points higher.
Furthermore, any special interest-rate promotions on the card, such as 0% interest until a particular date, may not apply to cash advances, meaning you may be charged unexpectedly.
Cash advances, unlike ordinary purchases, have no grace period. Interest begins to accrue on the day of the transaction. 1
Credit card issuers, in addition to imposing a higher-than-normal interest rate, automatically impose a transaction fee on the advance sum—for example, 3% to 5%, or a flat cost of, say, $10, whichever is larger. Furthermore, cash advances are often ineligible for rewards, cash-back schemes, or other credit card perks. Almost generally, your cash advance line is deemed independent from the remainder of your credit balance.
You can find information on your specific card on its website or in the materials you received when you joined up—if it’s a special offer, that’s where you should look.
How Does Credit Card Interest Work With a Cash Advance?
As previously stated, the interest rates on a cash advance vary from those on a purchase. A cash advance not only has a higher interest rate, but there is no grace period, so interest begins to accumulate from the day of the transaction. 3 Furthermore, even if you pay off your cash advance in full and have a zero amount for that billing cycle, you will be charged interest.
You may also pay off the cash advance over time, just like a purchase, as long as you make the necessary monthly installments.
How Your Payments Are Applied
Credit card payments over the minimum monthly amount are sent to higher-interest items first, thanks to the Credit Card Act of 2009. This marked a significant shift in how credit card firms may apply payments (previously companies could apply payments to lower-interest purchases).4
Assume you have a $5,000 amount on a card with a special annual percentage rate (APR) of 10% that you intend to pay off in 15 months, and you take out a $500 cash advance at a rate of 22.5%. Depending on the size of your payment, it may be divided across your balances.
If you just make the statutory minimum monthly payment, it will almost certainly be put to the $5,000 balance—at the credit card company’s discretion. Because it is reliant on the issuer’s procedures, it may be wise to check in with them about the payment. Because you currently have a load on your credit card, you will need to pay more than the minimum to pay off the cash advance faster. 4
Better to Simply Use the Credit Card Itself
Instead of getting a cash advance, consider using your credit card. If you absolutely cannot use a credit card to pay for anything, accept as modest a cash advance as possible to minimise interest costs, and be sure to pay off your debt as soon as possible.
The Bottom Line
Cash advances, like balance transfers, may be useful in certain situations. However, before continuing with these transactions, customers should understand the details of the deal, including interest rates and one-time costs. If you do not handle your high-interest cash advance loan properly, it might last for a very long period.
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