If you have a credit card, you probably receive an email or SMS from them regularly telling you just how easy and cheap it is to take a cash advance on it. Usually, the communication will use enticing language like ‘convenience’, ‘as simple as walking into an ATM’ and ‘low interest rate’. And no doubt it sounds tempting, to walk into an ATM and withdraw cash from it using your Credit Card instead of your ATM card, and using the cast without depleting your bank balance.
But the fact is, it is an option to be avoided unless it is a true emergency requirement. There are several reasons for this. We shall try to highlight them below:
1. Cash Advance Fees: Hidden in the terms and conditions for cash advances somewhere will be the clause that says how much you will be charged upfront each time you withdraw cash against your credit card. It could be a flat fee or it could be percentage of the amount withdrawn (in India, it is usually a percentage), but the odds are that it will be there, and it is nothing but an additional interest charge simply for using cash.
2. Higher interest rates: The interest rates on Cash advances are often separate and more than on your regular unpaid balance. Even if not, keep in mind that when you withdraw cash from your account, you at most have an opportunity cost of 4-6% per annum. The least a credit card company will charge you is 2.5% per month, or 36% per annum.
3. ATM fees: Unlike debit cards, which offer a certain number of free transactions at the Bank’s own ATMs and even at non-home-bank ATMs, withdrawals on credit cards are always subject to ATM withdrawal fees unless specifically exempted. So in addition to the fee for taking a cash advance and the higher interest rate, there will be a charge, even if nominal, for simply using the facility at an ATM.
4. No grace period: One of the main reasons Credit Cards are popular is the ‘grace period’ which is the time given from the date of bill generation to due date for payment in which to make the payment. If a customer makes the payment on full on or before the due date, the company cannot charge any additional dues or interest. However, this is not the case for cash advances. For these, the Credit Card companies can and will charge interest from the day the advance is used. This is because they are able to treat as a separate limit, more an overdraft than a use of the card itself. This means there is absolutely no grace period and you will end up incurring interest expense even if you pay the outstanding amount on the due date.
5. Allocation of payment: Another twist is that if you do not pay the full amount, the Credit Card company, since it treats the Cash advance separately, can leave it as an outstanding and apply the payment to the other dues on your card. This allows them to continue to charge the higher interest rate for a longer period of time.
6. No reward points: Similarly, this being a separate facility, it is not eligible for any reward points or cashbacks that you may otherwise be eligible for on your credit card.
In the final analysis, we see that there is virtually no upside to withdrawing cash on your Credit Card. In effect, a personal loan is a better option, and we have spoken before about how that too is not an optimal option. So keep that plastic in your pocket and resist the temptation to draw on that cash, unless you want to be burdened with a load of charges and interest expenses!
