Overview
Most credit cards allow you to withdraw cash from an ATM, known as a cash advance. While this can be convenient, the associated fees and high interest rates often make it an expensive borrowing option. Here, we’ll explore how cash advances work, their costs, and potential alternatives.
What is a Cash Advance?
A cash advance involves withdrawing money using your credit card. Essentially, this means borrowing money from your credit card issuer, which you must repay. Here are five key differences between cash advances and regular credit card purchases:
- Fees: Typically, you’ll be charged a cash advance fee, usually around 3% of the amount withdrawn, with a minimum charge of £3 or $5. For example, withdrawing £200 or $200 would cost you approximately £6 or $6.
- Higher Interest Rates: Cash advances generally incur higher interest rates than regular purchases, even if your card has a low or 0% interest rate for purchases.
- No Interest-Free Period: Unlike regular purchases that may offer up to 56 days of interest-free credit, cash advances start accruing interest immediately upon withdrawal.
- Credit Score Impact: Cash advances can affect your credit score, as they are often viewed by lenders as an indicator of financial distress or poor money management.
- Lack of Section 75 Protection: Withdrawn cash isn’t covered by Section 75 of the Consumer Credit Act 1974, meaning you won’t have purchase protection if something goes wrong.
Transactions Considered as Cash Advances
Besides cash withdrawals, other transactions might be classified as cash advances, incurring similar fees and interest rates. These include:
- Mortgage payments
- Foreign currency purchases
- Utility bill payments
- Gambling transactions, including lottery tickets and scratch cards
- Money transfers to a current account
- Share dealing or cryptocurrency purchases
- Government or court fine payments
- Topping up payment cards, mobile wallets, or electronic money
How Do Credit Card Cash Advances Work?
Obtaining a cash advance is straightforward. You can withdraw cash from an ATM using your credit card and PIN, similar to a debit card transaction. However, there are typically limits on the amount you can withdraw, which might be lower than your available credit balance. Additionally, ATMs often have daily withdrawal limits, usually between £300-£500 or $300-$500.
Cash advances can also be taken abroad, but this usually incurs additional foreign exchange fees on top of the standard cash advance fees and interest, making it a particularly costly option.
Remember that the aforementioned transactions are also considered cash advances, even if you don’t physically withdraw cash.
Should You Use a Credit Card for a Cash Advance?
While cash advances provide quick access to funds, they are an expensive borrowing method. It’s best to consider a cash advance only if you have no other options and are confident you can repay the balance promptly to minimize interest costs. Despite their high cost, cash advances can be cheaper than payday loans.
Alternatives to Cash Advances
Before opting for a cash advance, consider these alternatives which may offer lower fees and interest rates:
- Money Transfer Credit Card: These cards allow you to transfer money from your credit card to your bank account, enabling cash withdrawal without additional fees. Some cards offer 0% interest on transfers for a limited period, making them a potentially cheaper option if you can repay the balance before the promotional period ends.
- 0% Credit Card: If eligible, a 0% introductory offer on purchases allows you to avoid interest charges for a set period. This can be a more cost-effective option for planned expenses, with the added benefit of Section 75 protection for purchases between £100 and £30,000 or $100 and $30,000.
- Personal Loan: For borrowing larger amounts over a longer period, personal loans offer fixed interest rates. However, they are less flexible than credit cards and might not be suitable for smaller borrowing needs.
By exploring these alternatives, you can avoid the high costs associated with cash advances and manage your finances more effectively.