Most credit cards enable users to obtain cash advance up to a certain limit. This limit is calculated as a percentage of your current account balance. Monthly account statements will therefore show two sets of numbers: the credit card limit and the cash advance limit.
Typically, card holders are allowed by the bank to withdraw cash and if need be, obtain cash advances up to a pre-determined limit. The money is withdrawn from ATM machines but cannot exceed the stated value. If the amount needed does exceed the set value, the ATM will still dispense money but the transaction will be electronically flagged to the lender. Such an unauthorized withdrawal will be treated in the same manner as making purchases over your credit card limit and billed appropriately.
All in all a cash advance may sound like a good idea but you must be keen on the terms and conditions of the facility. Although it is convenient and life saving to obtain money when the need arises; it is also advisable to read the fine print. There are hidden charges that accompany these short term loans that may affect you in future. These include:
High APR (Annual Percentage Rate)
The APR charged for cash advances is usually higher than for normal credit card transactions.
Credit card companies normally charge mandatory processing fees for cash advances. Considering that this is not the only fee associated with the card, the total processing fees may turn out to be quite high. These fees are charged either upfront or when your monthly balance is due.
Credit Card Companies may apply your payments to the lower APR before dealing with the higher balance APR. Meaning if you do not settle your entire credit account balance, the money you pay will be used to clear the lower APR leaving you with the higher interest cash advance balance. Since the higher APR entails relatively high interest rates, this may significantly raise your debt.
However, the new credit card regulations have taken a step to address this issue. Credit Card Providers will soon be required to apply pro-rata payments on all balances. Until then, it is advisable to protect yourself from such extra charges.
No Grace Period
Cash advances on credit cards do not come with a grace period. Interest rates begin pilling up as soon as you withdraw the money. This can be disastrous for people who only pay when the balance statement arrives in the mail. Each day you fail to pay up, the interest on the advance keeps on pilling and you may end up with a hefty balance.
A cash advance is usually available with most credit cards. Due to the high interest rates charged on such advances, they are primarily an option of last resort. You must not wait until the balance is due so as to clear it. Pay off the advance as soon as possible. Nonetheless, sometimes it becomes necessary to take advances especially during tight financial situations. At such times, remember the points that have been outlined above to avoid having to pay hefty interest rates on your credit card.