Credit Cards have become a vital part of our daily lives. They help us manage our expenses and offer a sense of convenience. However, Credit Cards and Personal Loans tend to have some of the highest interest rates in India, making it difficult to get out of a debt cycle. But cash from Credit Card is an option worth exploring.
Besides the usual purchases, Credit Cards offer cash advance options, allowing users to withdraw cash from an ATM. While this seems like an easy solution to immediate cash needs, it’s essential to understand the fees associated with cash advances.
In this comprehensive guide, we’ll discuss what cash advances from Credit Cards are, how they differ from regular Credit Card transactions, and why they might not be the best idea.
What Are Cash Advances?
A cash advance, a short-term loan, is when you use your Credit Card to withdraw money from an ATM or a financial institution. Unlike typical Credit Card transactions, cash advances usually have high-interest rates, transaction fees, and no grace period.
If you withdraw from a Debit Card, your money gets debited from an ATM, while Credit Card provides a cash-in loan. With that Debit Card vs Credit Card comparison in mind, it is also important to note that cash advances, like any other loans, can lead to future credit issues. They can add to your Credit Card debt, increasing your credit utilisation ratio.
How Do Cash Advances Differ From Credit Card Transactions?
Credit Card transactions occur when you use your Credit Card to purchase goods or services. When you avail of a Credit Card, your lender usually doesn’t start charging you interest immediately. Instead, they offer a grace period of 18 to 48 days.
However, cash advances are treated differently than regular Credit Card transactions. Cash advances usually come with high-interest rates, no grace periods, and an up-front fee, a percentage of the total amount withdrawn. The fee varies depending on the lender. Furthermore, checking the terms and conditions of your Credit Card agreement is also essential.
Why Are Cash Advances a Bad Idea?
There are several reasons why cash advances are a bad idea. Here’s why:
High Transaction Fees: Cash advances come with high transaction fees, usually calculated as a percentage of the total amount withdrawn. This fee varies depending on the lender, and it’s essential to check with customer care to understand the charges.
No Grace Period: Unlike regular Credit Card transactions, cash advances don’t have a grace period. Your lender starts charging you interest immediately, which can quickly add up and lead to a debt cycle.
High-Interest Rates: Cash advances have high-interest rates, which can be as high as 25% or more, depending on your lender. Banks typically charge interest rates between 2.5% to 3.5% monthly. Since there’s no grace period, the high-interest rates start accumulating immediately.
Bad Sign for Lenders: If you frequently use cash advances, your lender may view you as a risky borrower, affecting your ability to obtain credit in the future. You may also be charged a higher interest rate, making it difficult to pay off your balance.
Do You Need a Cash Advance?
When you need cash urgently but have no funds in your Savings Account, withdrawing cash against your Credit Card can be helpful. However, it’s important to use this feature carefully and repay the amount as soon as possible.
You can consider alternatives like taking a Personal Loan, which typically has a lower interest rate than cash advances on Credit Cards. You can also check with your card-issuing bank if you can repay the cash advance using EMIs (Equated Monthly Instalments) that come with a lower interest rate than a cash advance.
You can also take a Gold Loan with gold jewellery or other assets. These loans usually have lower interest rates than Credit Card cash advances. However, remember to weigh the options carefully before making a decision.
If you’re considering a cash advance, it’s crucial to ask yourself whether you need it. Cash advances should be your last resort for immediate cash needs.
Also Read: Cashback vs Reward Points in Credit Cards
Cash advances seem to be an attractive way of getting quick access to money, but considering some financial implications is crucial for your financial record to remain healthy.