Beware of credit card cash advances!

Credit cards can be a useful way to manage your monthly finances, spread the cost of a big payment, or get rewards or cashback for your spending.

Cash advances from a credit card rank as the most expensive thing you can do – so don't consider withdrawing cash on your card unless it's an absolute  last resort.

When we talk about cash advances, we are primarily talking about making withdrawals at an ATM. But there are also other payments you can make on a credit card that may be considered a cash advance:

• buying Traveller's Cheques
• buying foreign currency
• gambling and betting transactions.

Withdrawing cash on your card attracts several charges, as well as a higher interest rate.

1. Cash advances are usually charged a higher rate of interest. While the average interest rate for purchases is approximately 22% per year, credit card cash withdrawals will usually be charged at rates averaging 27%.
2. Cash advances tend to attract interest from day one. Normally, purchases you make on your card get an interest-free 'grace' period for you to pay – this can be anything from 45 to 59 days. However, no such breathing period exists for a cash advance.
3. As well as interest, cash advances attract a fee – this is typically 3% of the amount you withdraw, with a minimum fee of £3, although these charges can be higher. There are only a few providers who do not have this charge.
4. Using an ATM abroad can bring an extra charge, on top of the interest and cash withdrawal fee. Foreign usage fees (charged by most cards) can be anything from 2.00% to 2.99% of the amount you withdraw.
5. If you use an ATM abroad, remember that the local bank that operates the cash machine may charge you for the privilege. There are also some ATMs in the UK that will charge you for their use.
6. If you make a purchase with cash withdrawn from a credit card, you don't get purchase protection. If you make a purchase using the card directly, you benefit from enhanced protection if your goods aren't delivered or don't meet the standards you expect.

If you find yourself in a situation where you must withdraw cash, try to minimise the pain by following these tips:

• If you know you may withdraw cash on your credit card before you apply, try to look for a card that does not charge for cash withdrawals.
• If you know you may use the card to withdraw cash abroad before you apply, look for a card that doesn't charge for cash withdrawals or for foreign use – there are only a couple of these about.
• Do you have to pay in cash? Wherever possible, use the credit card directly rather than paying in cash withdrawn from the card – it's far cheaper and gives you more protection.
• If you must make cash withdrawals using your card, try to take the cash in a bulk withdrawal rather than in dribs and drabs. If your card charges cash withdrawal fees, these are normally in the region of 3% and have a minimum fee of around £3. So, you'd need to take out at least £100 to pay 3%: withdraw less and you're effectively paying a higher percentage fee to get the money.
• Once you've withdrawn and spent the cash, try to pay off your credit card bill balance as quickly as possible. As previously mentioned, cash advances often get charged a higher rate of interest, so pay it off as soon as you can to minimise the amount of interest you'll pay. However, check with your card provider how they will allocate any payments made before a card statement is issued, as they may use the money to clear the outstanding balance from your previous statement. For example if you take a cash advance, then try to pay it off on payday before your next statement, the payment may be applied to the existing balance, not the cash advance.

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Guide to the Consumer Credit Act