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How do cash advances work?

How do cash advances work?
Image source: Getty Images.


If you are short of cash and you have a credit card, then a cash advance is a possible option.

However, before you do this, it’s a good idea to make sure you understand what a cash advance is and how it works. Read on to find out.

What is a cash advance and how does it work?

A cash advance is a process of withdrawing cash using your credit card. You can do this via three basic methods:

  1. Using a cash machine with your PIN number

  2. At the card provider’s bank using the credit card and ID

  3. With a retailer by asking for cashback

There are other transactions that may also be classed as cash advances. These are as follows:

  • Buying travellers’ cheques and foreign currency

  • Buying gift vouchers

  • Gambling and betting

  • Paying utility bills and making mortgage repayments

How much cash can I get?

The amount of cash will depend on three basic factors:

  1. Your credit limit, which is the maximum amount you can spend on your card.

  2. Your existing balance. The amount of cash you can get will be your limit minus the existing balance.

  3. Your cash advance limit. There may be a smaller limit on the amount of cash you can withdraw. You will need to check with your card provider.

What are the charges?

This type of transaction is available with most credit cards. However, there are charges that are accrued when you make this type of transaction.

You will be charged a cash advance fee, which can be a percentage of the amount you are withdrawing.

You will also be charged interest on the amount from the day of withdrawal until the balance is paid off in full.

What are the advantages and disadvantages?

The main advantage is that it is a quick and easy way to obtain cash in an emergency.

The main disadvantage is that it is a very expensive way to borrow money. Compared with other methods, the total amount charged in terms of fees and interest is high.

For example, a typical credit card will charge a 3% fee and interest at 25% pa. Taking £1,000 over a year will cost you a £30 fee and £250 in interest.

Bear in mind that this is a basic calculation. It does not make allowances for an existing balance. Also, credit card providers can dictate the order in which your payments are applied.

So, if you have an existing balance due to purchases, your card provider may pay these off before the cash advance. If this happens you could end up paying more interest because it takes longer to pay off the balance.

Another disadvantage is that it can negatively affect your credit score. This is because it can give the impression that you are experiencing financial problems.

Finally

A cash advance is useful for emergency situations, but think carefully and consider other options if you don’t need the cash immediately.

You could apply for a credit card that offers an introductory 0% interest rate on purchases and balance transfers. Take a look at our selection of the best 0% credit cards.

If you are experiencing problems with debt, it might be a good idea to tackle the issue. The National Debt Advice service offers free debt advice and assistance.

Looking for a new credit card?

Great credit card offers are out there — you just need to know where to look! If you’re after some of the top offers on the market, a great place to start is our list of the top credit cards.


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