Cash Advance on Credit Cards
Is it good to get cash advance from your credit card? My answer will be; ‘it depends on the situation surrounding that decision to withdraw cash from your credit card. No matter how you plan your finance, you may find yourself in a situation where you need to make cash payment. If you don’t have the cash available with you, you may be left with no option other than to withdraw cash using your credit card. Of course, this seems to be an advantage of having your credit card with you. It can actually be beneficial but at the same time, it comes at a cost. Let’s quickly consider the costs you may likely incur when you make cash advance from your card.
For every time you make cash advance, there is a cost attached to it in form of ATM withdrawal fee. The fee varies from one card issuer to the other but it is usually within the range of 3 and 5 per cent. Others may charge a flat fee while others may make it the hybrid of the two by charging a certain percentage of the amount involved in the transaction or a minimum of certain fixed amount. If you use your credit card to make cash withdrawal, it is actually considered as cash advance from your card issuer. Therefore you will be expected to pay the transaction fee. In as much you make cash advance from your credit card, you can’t avoid this fee. If you want to avoid the fee, then you should avoid cash advance totally. However, you can reduce the amount you incur on transaction fee through adequate planning. You should not withdraw more than what you need especially if the fee is expressed as a percentage of the transaction involved. On the other hand, if the fee is flat, it means that you will be required to pay a particular amount any time you make a credit card cash advance. In this case, it is better to withdraw enough amounts that will be adequate to pay for what you want to buy without the need to make another withdrawal. In determining the best way to make cash advance, let’s consider the following examples:
- Flat fee: Supposing your card issuer charge a flat fee of $10 on cash advance. If you need $200 but you withdraw the amount in two instalments say $150 first and later $50, you will end up paying $20 as a cash advance fee. But supposing you withdraw the whole $200 at once, the withdrawal fee will have been $10 only. So, in this circumstance, it is better to withdraw what you need at once than to under-withdraw and later make additional cash advance.
- Percentage: Let’s assume that the cash withdrawal fee is 5%. The number of times you make the cash withdrawal may not be important. We shall still follow the above example where the $200 is withdrawn in two instalments. In the first withdrawal, the transaction fee will be 5% of $150, which is $7.50. In the second $50, the fee will be $2.50. Therefore, the total transaction fee will amount to $10. If the whole amount of $200 is withdrawn at once, the fee will still be the same amount. That is, 5% of $200 will still be $10.
From the two examples, you must have discovered that it is better to make cash advance that you consider enough for what you want to do at once if the transaction fee is fixed. Whereas, if the fee is based on a certain percentage of the transaction, you will be able to save costs when you withdrawal just amount you need without making excess withdrawal. You can always make additional withdrawal when the need arises.
The interest rate that is applicable to cash advance is higher than the interest rates that apply to regular purchases. This means that you will be paying higher interest on cash advance. To worsen the case, the interest will start accumulating immediately the cash advance is made. The only way to ensure you don’t pay this exorbitant interest rate is to ensure that you pay off the cash advance almost immediately. High interest may make it impossible for you to meet your minimum payment thereby leading to debt which you may not be able to repay on time.
Cash advance may make cardholder to max out his credit limit. When you constantly max out your credit limit, it will affect your credit score. I believe you understand that your credit score determines your creditworthiness in the eyes of lenders and insurance companies. If your credit score is poor, you will be charged high interest rate on any loan you apply for. In the same way, you may not have access to cheap insurance quotes. It is good to mention here that your cash advance limit may be different from your credit limit. In most cases, cash advance limit is usually set below the credit limit you are entitled to. If you don’t know your cash advance limit, it is better to ask from your card issuer.
Read Also: Advantages and disadvantages of credit cards
Credit card cash advance is very expensive in all respects. You should do everything within your ability to avoid it. In case you want to consider the cash advance option, it should be considered as a last resort after all other sources must have failed. Frequent cash advance can hurt your credit score. Also, if you make too many cash advances, it can be a reflection of your inability to manage or organise your finance very well. Some lenders may want to think twice before extending any credit to you. If they do at all, it can be at a very high interest. On this note, it is better to have an emergency fund where you can easily pay for any unforeseen expenses such as medical bills. If you are able to cultivate a saving habit, you will be surprised at how much you will have standing in your saving account provided you are consistent about it. Instead of taking cash advance from your credit card, you can easily withdraw from your saving account in case of emergency. Again, if at all you are pressed to make cash advance, it should be done with caution. Also, you should ensure that you pay it off almost immediately as the interest start accruing immediately you make the withdrawal.