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A credit card cash advance allows you to withdraw cash directly from your credit card, similar to taking out a loan. However, this convenient feature comes with significant risks and costs that can quickly add up. Many people may turn to a credit card cash advance in times of emergency, but it’s important to understand how it works, its potential consequences, and the alternatives available.
A credit card cash advance is essentially borrowing money against your card’s credit limit. It allows you to withdraw cash from an ATM or over the counter at a bank. While this might seem like an easy solution, these withdrawals come with their own set of fees and conditions.
Typically, a credit card cash advance fee, which is a percentage of the amount withdrawn, often around 2% to 5%, is applied on the transaction. For example, if you withdraw ₹10,000, you might be charged a fee of ₹200–₹500.
In addition to the fee, interest on the cash advance begins accruing immediately and can be much higher than the interest rates on regular purchases made with your credit card.
Cash advances are typically limited to a portion of your overall credit limit, so you may not be able to withdraw the full amount available on your card. Also, most credit card companies do not allow you to earn rewards points or cashback for these types of transactions. Given the high costs and immediate interest charges, it's crucial to fully understand the implications before opting for this option.
Using a credit card cash advance can quickly lead to financial issues. Here are some key reasons why it’s best to avoid relying on cash advances from your credit card:
One of the most significant drawbacks of using a cash advance credit card is the high fees and interest rates associated with it. Unlike regular purchases, which often come with a grace period during which no interest is charged, a credit cash advance begins accruing interest immediately. This means you will be charged interest from the day of the withdrawal until it is paid off, which can result in a substantial amount of debt accumulating over time.
Interest rates for cash advances are often much higher than for regular credit card purchases, ranging from 20% to 30% per year. On top of that, you may face a one-time cash advance credit card fee, which can further increase the amount you owe. These high costs make it easy to see how a small cash withdrawal can quickly snowball into a significant financial burden.
For example, if you withdraw ₹5,000 with a fee of 3% and an interest rate of 25% per annum, your monthly interest could amount to around ₹100–₹120, in addition to the upfront fee.
Taking out a cash advance can also negatively impact your credit score. One of the factors that credit bureaus use to determine your credit score is your credit utilisation ratio, which measures how much of your available credit you are using. When you take a cash advance, you are essentially increasing your credit usage, which can cause your credit score to drop.
For example, if you have a ₹50,000 credit limit and withdraw ₹10,000 as a cash advance, your credit utilisation ratio jumps by 20%. A higher ratio can signal to lenders that you may be struggling financially, which can affect your creditworthiness in the future.
Unlike regular purchases made on your credit card, which often come with a grace period (usually between 20 to 30 days), there is no grace period for cash advances. This means that interest begins accumulating immediately after you make the withdrawal. Even if you pay off the cash advance balance quickly, you may still incur significant interest charges in the interim.
This lack of a grace period is one of the most overlooked disadvantages of using credit card cash advances. While you might be accustomed to paying off regular purchases within the grace period to avoid interest charges, the same does not apply to cash advances.
Frequent use of credit card cash advances can quickly lead to a cycle of debt. The high fees, immediate interest charges, and accumulated debt can make it difficult to repay the amount borrowed, especially if you only make minimum payments. Over time, this can result in higher outstanding balances, leading to higher interest charges and the potential for being trapped in debt.
If you rely on cash advances regularly, you may find it harder to pay off your credit card balance, which could result in increasing debt and growing financial stress.
While credit card cash advances may seem like a quick solution in times of financial need, there are alternative options that are often more cost-effective and less risky.
Here are some alternatives to consider:
A personal loan can be a better option if you need cash quickly. Personal loans typically offer lower interest rates than credit card cash advances, and they come with fixed repayment terms, which can make it easier to manage your debt. If you have a good credit score, you may qualify for a personal loan with a lower interest rate, which can help you save money in the long run.
For example, if you need ₹50,000, a personal loan may charge you an interest rate of around 10% per annum, compared to the higher rates associated with credit card cash advances.
Having an emergency fund can help you avoid resorting to a credit card cash advance in the first place. An emergency fund is a savings buffer that you can rely on in times of unexpected financial need, such as medical expenses or urgent repairs. By setting aside a portion of your income each month, you can build up an emergency fund that will cover any unexpected expenses without the need to borrow.
A general rule of thumb is to save at least three to six months’ worth of living expenses in your emergency fund. This will provide you with peace of mind and help you manage financial emergencies without turning to high-cost borrowing options like cash advances.
Another alternative to credit card cash advances is using your debit card for cash withdrawals. If you have a sufficient balance in your savings account, withdrawing cash from an ATM using your debit card can be a much cheaper option. There may still be withdrawal fees depending on your bank, but these fees are generally much lower than credit card cash advance fees. Additionally, with a debit card, you won’t have to worry about high interest rates, as the money is coming directly from your account rather than being borrowed.
For example, some banks may charge a small fee of ₹20–₹30 for ATM withdrawals using a debit card, compared to the larger fees and high interest rates that come with credit card cash advances.
Avoiding credit card cash advances is possible with proper financial planning and disciplined spending habits. Here are some practical tips to help you stay on track:
Creating a budget is one of the most effective ways to avoid the need for a cash advance. By tracking your income and expenses, you can ensure that you have enough funds to cover your regular spending and unexpected costs without relying on credit. Planning ahead for large purchases or emergencies by setting aside savings can reduce the temptation to turn to cash advances when you face an unexpected expense.
As mentioned earlier, having an emergency fund can be a lifesaver when you’re faced with urgent costs. By setting aside a portion of your monthly income into a separate savings account, you’ll have a cushion to cover unforeseen expenses, such as medical bills or car repairs. Having access to this fund means you won’t need to take a cash advance on your credit card to get by in times of crisis.
Another way to avoid cash advances is by using your credit card responsibly. This means only spending what you can afford to pay off each month, paying off your balance in full, and avoiding withdrawing cash. When you use your card for regular purchases, be sure to make timely payments to keep your balance low and avoid accruing unnecessary interest charges.
By paying attention to your credit usage and maintaining good financial habits, you can keep your debt under control and avoid the temptation of cash advances.
If you’ve already taken a credit card cash advance and are facing high fees and interest charges, it’s crucial to act quickly to minimise the financial impact. Here are some steps you can take to pay off your balance as efficiently as possible:
The most effective way to reduce the debt on your cash advance is by making larger payments than the minimum required. This will help you pay off the principal balance faster and reduce the amount of interest you accrue. If you can afford it, try to pay off the entire cash advance balance as soon as possible to stop the interest from accumulating.
If the interest on your cash advance is high, you may want to consider transferring the balance to a credit card that offers a 0% introductory APR on balance transfers. Many credit cards offer promotional periods where you can transfer balances without paying interest for a set time, typically 6 to 18 months. This could give you the breathing room to pay off the balance without incurring additional interest charges.
If you’re struggling to pay off a cash advance or other debts, it’s a good idea to seek professional financial advice. A credit counsellor can help you create a plan to pay off your debt and may even be able to negotiate lower interest rates with your creditors. It’s important to act sooner rather than later to avoid falling further into debt.
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| 1min read
Posted on 16 May
Roshani Ballal
Academy by Bajaj Markets
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