A credit card cash advance is a perk that enables card users to withdraw physical cash from a compatible ATM, up to a portion of one's credit limit. Do note that not all credit cards offer cash advances to all card holders due to various risks and factors; as such, they can be considered a premium credit card feature.
When available, cash advances can significantly contribute to the financial flexibility offered by a credit card, effectively covering both cashless purchases and cash-only contingencies. In cash-reliant countries like the Philippines or Japan, the advantage of being able to borrow cash wherever there's an ATM is clear.
However, the feature does have major drawbacks, namely the higher cost of borrowing. As mentioned, cash advances are seen as riskier for card issuers, as these do not go through the typical credit process. This means issuers will generally impose immediate service charges and higher interest rates compared to regular credit card purchases to minimize losses.
This doesn't mean that you should never use cash advances, however. Indeed, knowing how to cash advance in credit card at the right times will increase your financial flexibility and give you room during cash emergencies. Here are some general guidelines on when and how to use cash advances.
1. Limit Yourself to One Cash Advance Per Billing Cycle-And ONLY When Necessary
If you must take out a cash advance, limit it to one per billing cycle. Borrowing fees and compound interest will work against you when you take out a credit card cash advance, so you'll want to minimize your repayment issues by having just one advance at any given time-that is, if a cash advance is even truly necessary to begin with.
2. Never Use Cash Advances As a First Option
Cash advances are among the most expensive ways to access physical cash. This means they should be treated as a last resort after you've explored all the other options. In general, you just want to take on one cash advance at a time, at the smallest possible amounts you need. Unplanned or too frequent usage will eventually strain your finances for very little gain.
Thankfully, cash advances are seldom your only option. You may already have a debit card or a credit line option that will work just as well, without as much risk involved.
3. Use This Feature for Serious Emergencies Only
Before taking out a cash advance, assess whether it is absolutely necessary. If the expense can wait, explore other payment options or try readjusting your budget for the situation. In many cases, asking for a payment extension, using your emergency funds, or tapping your personal connections for a loan can be preferable to taking on the burden of a badly-timed cash advance.
4. Remember Your Cash Advance Fees
Credit card issuers charge a fee for cash advances, which can either be a fixed amount per transaction, a predetermined percentage, or both, depending on the specific card. Before you take out these loans, you must read up on these costs and weigh them against the benefits of having immediate cash. In particular, look up your credit card's cash advance policies, including limits, fees, and interest rates.
5. Consider the Interest Rates
Cash advances will almost certainly carry higher interest rates than regular card purchases. Indeed, they are often more expensive than other consumer loans. This is made even costlier through the immediate accrual of interest, beginning right when you receive your cash. If you think you can't pay off the principal and compounded interest after a month, start considering other options.
6. Repay the Advance as Quickly as Possible Before Making Another One
Again, compound interest works against you when you take out a cash advance. That is to say, the faster you repay a cash advance, the less interest you will accrue. Always aim to clear the full balance within the same billing cycle to avoid potential debt spirals.
7. Avoid Cash Advances for Large Sums
Limit any advances you do make to small amounts that you can comfortably repay. Large or frequent cash advances can increase your credit utilization ratio, which may signal an elevated risk to lenders who will then lower your credit score. Keeping your credit utilization ratio below 30% is generally recommended to prevent serious impacts on your creditworthiness.
8. Be Mindful of Security Risks When Withdrawing Cash
Though the rise of digital cash alternatives means that lines at ATMs aren't too long these days, the risks of theft and fraud are still real. Be on the lookout for sketchy ATM hardware or suspicious activity before you start withdrawing. If something doesn't feel right, find another ATM at a secure location.
If You Have To Use Cash Advances, Use Them Responsibly
While credit card cash advances can be a source of financial relief, you don't want to use them unless you have to. The significantly higher cost of these loans over normal credit card purchases or even typical private loans can easily result in a debt spiral for what are supposed to be innocuous purchases.
If credit card advances are indeed necessary, the most important thing to do is pay them on time and as quickly as you can. This way, these advances can remain a benefit rather than a serious risk to your financial well-being.
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