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Beware of credit card cash advances!

Category: Credit cards
Author: Tim Leonard
Updated: 08/02/2018

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.

But there can be downsides to using a credit card. The biggest is the expense accrued for not paying your balance off in full each month – if you don't, your flexible friend can soon become quite costly.

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 a last resort.

Cash advances aren't just ATM withdrawals

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
  • making an electronic cash transfer (such as transferring some money from your credit card to your current account to make sure you can pay a bill)

If you're considering making an unusual transaction, it's probably worth checking with your credit card provider first to see how it will be treated.

Six reasons why a credit card cash advance can be expensive

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 20% per year, credit card cash withdrawals will usually be charged at rates averaging 26%.
  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 60 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 the majority of cards) can be anything from 2.50% 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.

How to minimise the impact of cash advances on your credit card

If you find yourself in a situation where you have to 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 have to 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 as quickly as possible. As previously mentioned, cash advances 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.

Remember, in order to secure a mortgage, credit card or personal loan you need to have a good credit rating. To find out if yours has a clean bill of health, contact a credit check provider such as Experian CreditExpert to investigate your credit report.

What next?

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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.