Credit Card Cash Advances Can Kill You!

 

Credit cards are such amazing inventions, right? Those rectangular pieces of plastic open up a whole new world of funds and freebies. One swipe of a credit card can get you anything you want or need, including cash of course. It is nothing but convenience right at your fingertips. However, are you aware that such convenience comes at a steep price - literally! All credit card users are hopefully aware of the risks of debt that tag along all instruments of credit. One tiny, seemingly trivial mistake like missing a due date can cost you dearly. However, nothing is more of a pitfall than credit card cash withdrawal. Whether you make a mistake or not, cash advances can cost you a fortune for no significant fault of yours.

What is a Credit Card Cash Advance?

Did you know that you can withdraw money from ATMs using credit cards?

When you use a credit card to withdraw liquid cash from an ATM, the credit card companies call it a "cash advance." Some lenders also provide convenience cheques to their customers to pay for purchases in situations where the vendor doesn't accept credit cards but accepts cheques.

The process of taking a cash advance is the same as that of making a cash withdrawal from an ATM with your debit card. However, when you withdraw cash using a credit card, the money isn't yours - you are essentially pulling funds from your credit card account.

Credit cards have a cash advance limit, denoting the maximum amount of cash that can be advanced against the credit card's balance. The cash advance limit is usually much lower than the overall credit limit. Typically, it is set as a proportion of the credit limit - if the credit limit changes, so does the cash advance limit. Interestingly, currency purchases made through credit cards also count as cash advances - be it foreign currencies, cryptocurrencies, or stocks.

Cash advances should ideally be used only in emergencies because they come with a higher APR than your regular credit card balance, and banks often charge cash advance fees in addition to ATM fees.

What's the Problem Here?

Well, everything! Unbeknown to you, credit card issuers impose an entirely different set of terms and conditions on cash advance transactions. If you wish to understand that, you first need to know how normal purchases on credit cards are generally billed.

Credit Card Billing System

Credit cards have a fixed billing cycle with a billing date. The bill, with a list of purchases made over the entire billing cycle, is generated on the billing date. This bill has a due date by which you have to pay the amount back to the bank. You can either pay the total outstanding or the minimum due. The minimum due is a certain proportion of the total outstanding amount which you must mandatorily repay every month in order to avoid defaulting.

Let's assume that your credit card bill date is the 2nd of every month. The due date is typically 22 days after the billing date, i.e., 24th of every month. The purchases you make even a day before the billing date - let's say on the 1st of a particular month - becomes a part of your current bill, which has to be paid by the 24th of the current month. If not, a late fee, as well as an interest rate, is levied on the amount.

The purchases you make on the 3rd of any month will have to be repaid on the 24th of the next month; so, you get at least 50 days of free credit. However, this logic does not apply to cash withdrawals using a credit card. There is no concept of a 'free credit period' in the case of cash advances.

Cash Advance Billing System

When you withdraw cash using credit cards, the interest starts accumulating from day one. This interest typically varies from 2.7% to 2.85% per month. Since credit card interest is compounded monthly, the effective APR (Annual Percentage Rate) tends to be around 38% to 40%! Moreover, a cash withdrawal charge is also levied, which is either a flat rate or around 2.5% to 4% of the withdrawn amount, whichever is higher.

For some cards, the APR for cash advancement may be the double of the APR for regular purchases. Additionally, ATM fees and foreign transaction charges are imposed if you are abroad while making the transaction. This might catch you off guard, since most of us are unaware of these different norms.

So, drawing on our previous example, let's assume that you have withdrawn Rs.10,000 on the 3rd of the month using your credit card. Interest will be piling up till the time your bill is generated, i.e., the 2nd of the next month - after 29 days. These 29 days are not interest-free.

Assuming that you pay the bill right away, the interest for this period, at the rate of 40% per annum, on an amount of Rs.10,000 works out to around Rs.333. This interest is over and above the cash withdrawal charges of approximately Rs.350. Effectively, you end up paying an extra amount of at least Rs.680 in just a month for a withdrawal of Rs.10,000 using a credit card.

Imagine what will become of this figure if it keeps compounding for a year? The longer you take to pay off the amount, the heftier the interest will be.

What is the Right Way?

Anything but cash advances. If you can ever help it, never withdraw cash from credit cards for everyday expenses or fun or even to make ends meet until your next payday. Use your credit card for retail purchases only - pay your utility bills, buy your groceries, fund your entertainment with credit cards.

Always use a debit card to access cash. If you simply fall short on money, consider a side gig for a little more cash, sell off a couple of your belongings on OLX, or just approach someone you are close to. Even a personal loan has lesser charges than this. A cash advancement can never be a good solution to your problems, as it will only add more.

To Sum Up

The world of credit cards is an enigma. It's known for its quintessential perks as well as its notorious debt traps. Cash advancement is the most dangerous feature of a credit card, which can easily pull an ignorant customer into a quagmire of debt. Keep yourself safe. Don't use your credit card to withdraw cash.