What is a Cash Advance on a Credit Card?

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Woman drawing a cash advance using a credit card

There are times when you might find there are circumstances when you want a sum of cash quickly, but there aren’t enough funds in your bank account. In such situations, it is possible to get a cash advance using a credit card. As with a regular credit card transaction, you will need to pay this back. However, this will usually incur extra fees and a higher percentage rate of interest. Credit cards can be very convenient for making high value purchases, but when it comes to taking a cash advance from them, this can become expensive.

Credit cards are different to using a bank debit card. Debit cards do not bring the same fees and charges, and are made to withdraw the cash in your account. This is also true of prepaid cards used for controlling a budget, such as going on holiday. With debit cards and prepaid cards, the money is already in your account. With credit cards you are being lent the money to pay back.

How does a credit card cash advance work?

Cash advances with a credit card can be made by simply going to a cash point and drawing out the money you need using your credit card, in the same way you would with a debit card. When drawing cash from your credit card, you are likely to be faced with fees and minimum repayments.

These tend to happen in two ways, and you can be charged for both. Firstly, the cash withdrawal can incur a cash advance fee, which is usually a set percentage. Each time you withdraw cash, this percentage will be charged. With this in mind, if it’s essential to draw out cash from your credit card, it’s best to think about the total you’ll need and not withdraw money in bits and pieces.

Aside from the withdrawal fee, you will most likely incur ongoing, even daily, interest. This interest will accumulate until the total credit card balance is repaid. Interest rates on cash withdrawals are often higher than on purchases, so check if it’s worth taking the cash out instead of buying something with the card itself if it’s for a product or service.

Is a Cash Advance Bad for Your Credit Score?

A cash advance from a credit card account can appear on your Equifax Credit Report. As one of the most expensive ways to withdraw money, it can have a negative effect on your credit score, highlighting possible issues with money management With this in mind, it may also have an affect on a lender’s decision to offer credit, especially if you’ve made several cash advance withdrawals over a short period of time.

What’s the Difference Between a Loan and a Cash Advance?

Although a loan and a cash advance can give you access to money quickly, they do behave in quite different ways. A loan is usually set up for a fixed lump sum with clearly defined repayments and agreed interest rates. For example, a consolidation loan can help to pay off several different bills and ongoing financial obligations. This can be useful if you’re paying interest to lots of different providers and it’s difficult to get financially back on track. A consolidation loan brings all these debts into one place as part of a long term plan.

While a cash advance can give you cash quickly like a loan, there is no fixed plan for repayment. This is more of a short term solution that can become more expensive the longer you leave to pay it back. Another difference is that you can also shop around for a loan that is better suited to your needs. A cash advance will be limited to your credit card’s rates and charges on cash withdrawals.

Withdrawing Cash Overseas

Although it’s common practice to use a debit card, not a credit card, when withdrawing cash while in the country where you live, this isn’t always the case when travelling abroad. Your debit card is likely to charge a fee of around 3% transaction fee on each withdrawal overseas, as well as a fee on purchases of up to and approximately £1.50 (although this can vary depending on your bank).

In light of this, there are some credit cards that will actually provide a better rate than debit cards when used abroad. These are specialist travel credit cards, which have perks such as a low percentage rate for withdrawing cash (and sometimes no rate at all). These are available from various banks and lenders dependent on application.

Another alternative is to use a prepaid travel card. These are incredibly useful when travelling as it avoids the need to carry cash and can help keep spending to a particular budget. They work by ‘loading up’ the card with a cash amount before travelling.

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This article was written on 1st March 2022; all information was correct at the time of writing.

You’ll find more information on money management and how credit cards and loans can affect your credit score at our Knowledge Centre.

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