4 Things to Consider Before Getting a Credit Card Cash Advance

Almost every credit card gives you the ability to take a cash advance. You can withdraw cash from a credit card simply by using it at an ATM machine, but there are several things about this that you should keep in mind.

I was reminded of these things recently, when a friend took a small cash advance from his credit card, and faced a whole lot of fees that he wasn’t aware of.

4 Tips When Apply for a Cash Advance
1. Higher APR
2. Cash Advance Fee
3. Repayment
4. No Grace Period

1. Higher APR
The cash advance APR for a credit card is usually much higher than the regular APR of the credit.

2. Cash Advance Fee
Most credit cards will charge you a fee when you take a cash advance. For example, the Chase Sapphire Card charges a transaction fee of 3% or $10, whichever is higher, when you take a cash advance. If you withdraw $100 as cash advance – you will get a net of $90 after taking into account the cash advance fee. The fee will either be charged up front, or when your balance is due (depending on the credit card terms).

3. Payment may be applied to a low APR balance first
Some credit cards apply your payments towards a lower balance APR first, before moving to a higher balance APR.

Let’s look at this with an example. Suppose you have a credit card that has an APR of 16.24% on regular purchases, and 19.24% on cash advances. You buy stuff worth $100 and take a cash advance of $100. You pay $100, when your balance becomes due. Some credit cards will use this money to apply towards the lower APR balance first. This means they will use the money to clear off the balance created with the regular purchases, so you will still have $100 outstanding from your cash advance, on which interest will be charged at a higher rate of 19.24%.

To avoid this situation, you should try and get a cash advance on that credit card, which has no or minimal other balances. With the new credit card regulation changes, credit card companies will not be able to practice this any longer. After the regulation changes, — they will need to apply the payments pro – rate on all the balances. Until then, you need to keep this in mind and protect yourself from the extra fee.

4. Cash advances don’t have a grace period
Credit card companies usually don’t allow a grace period for cash advances. This means that interest starts piling up as soon as you take the cash advance. Most people are used to shopping on their credit cards, and then paying the bill, when their statement arrives. This is not good if you have taken a cash advance because interest keeps adding up every day you don’t pay off. The key here is not to wait for the balance to be due, and pay off whatever you can, as soon as you can.

The best option is to avoid cash advances, as the high fee truly makes it an option of last resort. But, sometimes despite our best intention, things become a bit tight, and we are forced to do things we don’t like. Next time you take a cash advance, keep these tips in mind, and minimize the fees you pay on such advances.

This article is a guest post written by Manshu from One Mint, an investment blog that covers topics ranging from Indian IPOs to U.S. ETFs, and everything in between. If you liked this post, please consider subscribing to his feed.

Published or Updated: June 12, 2012

Comments

  1. I think that each of those things are things that many people do not take into consideration before getting a cash advance. One of the biggest misconceptions is probably that the APR for purchases is the same as for cash advances.

    • Manshu says:

      Yeah surprising as it is, – even simple things like different APRs are not very well known.

  2. Edwin says:

    Great overview of credit card cash advances, I particularly like points 3 and 4 which are far less known in the general public.

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