Nisha, an interior designer by profession, was cruising along in life just fine when she was suddenly faced with an emergency situation. Her mother fell sick which called for a number of unexpected expenses. While she had some amount saved for such emergency expenses, a friend told her about the credit card cash advance and she chose to go with the latter without researching about its terms and conditions. It was only a few months down the line that she realized how big a mistake it was.
Credit card cash advance facility lets you withdraw money from an ATM or bank directly using your credit card. While it may be tempting to withdraw cash from your credit card during emergency, you should not ignore the fact that cash advance is an extremely expensive option. Just like any other expense that you put on your credit card, you have to pay back the amount withdrawn. You might also be required to pay some additional charges for the withdrawn amount.
So, before you swipe your credit card at the nearest ATM, let us talk about a few things.
Out of your total credit limit, banks assign a certain cash limit on your credit card. This usually ranges from 20 to 30 percent of your total limit and can be withdrawn from any ATM using your card.
What makes credit card cash advances so expensive?
It may be the most convenient way of getting some cash at your disposal but it is also the most expensive one. The reasons are mentioned below-
1- It incurs additional fee
Cash advance on credit card attracts an additional fee. Some banks charge a flat amount while others charge it as a percentage of the amount withdrawn. Most of the banks charge a flat fee or a percentage of the amount, whichever is higher. The table given below shows the cash advance fee charged on some leading credit cards-
|Credit Cards||Cash Advance Fee|
|SBI Card Elite||
At Domestic ATMs- 2.5% of transaction amount, subject to a minimum of Rs. 300
|HDFC Regalia Credit Card||
2.5% of transaction amount, subject to a minimum of Rs. 500
|Citi Premiere Miles Credit Card||
2.5% on the billed amount withdrawn, subject to a minimum of Rs. 500
|American Express Platinum Reserve Credit Card||
3.5% of the Cash Advance amount, subject to a minimum of Rs. 250
|HSBC Visa Platinum Credit Card||
2.5% on the billed amount withdrawn, subject to a minimum of Rs. 300
2- It offers no interest-free period
One of the major disadvantages of cash advances is that it does not offer any grace period. The bank starts charging interest on the amount from the very next day so until the next bill is generated the accumulated interest amount will be substantial. Ideally, you should not wait for the bill and pay the amount as soon as possible.
3- Interest on cash advance may be higher
Most of the banks charge interest on credit card cash advance same as the interest charged on other purchases. However, based on the bank and the type of credit card, you might be required to pay extra interest charges on cash withdrawal. If you pay the outstanding amount on time, you would have to pay less interest but the longer you take to pay back the more interest cost will be accrued. You must read the terms and conditions on your credit card to know the interest charges on cash withdrawals.
Taking out cash advance may lead to a bigger financial problem in future. Since, cash advances are to be paid in full in the next statement, you need an amount equal to what you have withdrawn by the next month. A number of people face difficulties in arranging for the same and cannot pay in full which again leads to heavy interest charges. So you are at a larger risk of credit card defaults when you take out a cash advance.
Alternatives to Cash Advance
Instead of sinking yourself in a debt burden by taking a credit card cash advance, you can weigh some other options to arrange for a financial crisis. One of these may be a good help-
Personal Loan – Nowadays, a number of banks offer personal loan at attractive rates of interest and the amount is also disbursed within a few days. Though personal loan also attracts interest charges, the terms of repayments are favourable as compared to cash advances.
Short-term Personal Loan – Platforms like CASHe, StashFin, Paysense, Early Salary and Shubh Loan have stepped into the lending market to meet the emergency cash requirements of people. A short sum is made available to the borrowers which has to be paid back within a short tenure, say 3 months. This is also a worthy alternative.
Savings – Although we do not suggest this, but it will be better to dig into your savings than taking a highly expensive credit card cash advance. This option should be considered if you need a small sum.
Apart from these, you can also borrow money from a friend or relative to meet a small need of cash. This may be awkward but it will sure be worth the savings. The ideal way to meet such expenses is to create an emergency fund and start saving in advance. The bottom line is that cash advances are extremely expensive and should not be used unless there is no other way out.[/vc_column_text][/vc_column][/vc_row]