What is a cash advance on a credit card?

Need cash quickly? Cash advances can be a convenient way to receive funds without going through credit checks. However, it’s essential to be aware that getting a cash advance on your credit card can result in high-interest rates and fees.

In this article, we’ll cover how a cash advance works and the rates, fees, and costs associated with cash advances. 

Let’s get to the following commonly asked questions:

• How does a cash advance work?
• What are the fees and interest rates for cash advances?
• What are the risks of taking out a cash advance?

Q1: How does a cash advance work?

A cash advance is a type of loan from your credit card provider rather than a commonwealth bank, often with higher interest rates compared to a home loan or personal loan. Credit card issuers allow some customers to withdraw money directly from their accounts, acting as a short-term loan. 

A cash advance typically works like this:

1. Transaction initiation: Cardholders initiate a cash advance by using their credit card to withdraw money at an ATM, a bank branch, or even through Internet banking apps that offer cash advances.

2. Withdrawal limit: Your Credit card account will have a limit for cash advances. It’s often a percentage of your overall credit limit. 

3. Transaction fees: Cash advances usually come with transaction fees. These fees are either a flat amount or a percentage of the total amount withdrawn. For instance, a cardholder might be charged a fee of $10 or 5% of the cash advance amount, whichever is higher.

4. Interest rates: Interest on cash advances usually is higher than the interest rates for regular credit card purchases, leading to increasing fees and charges. The interest accrues immediately after the cash advance without the grace period that might apply to other purchases. 

5. Repayment: When the credit card bill is due, the cardholder must make at least the minimum payment, which typically covers a portion of the outstanding cash advance balance. However, suppose the cardholder has other balances on the card (such as regular card purchases). In that case, the payment might be applied to those balances first, potentially leading to higher interest charges on the credit card cash advances.

Related: The definitive guide to debt consolidation loans

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Q3. Why are interest rates a crucial factor in determining mortgage affordability?

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Q2: What are the fee and interest rates for cash advances?

Cash advances can lead to higher credit card fees and interest charges than regular transactions. The fees you’ll pay depends on the type of credit card account and your cash advance APR.

Let’s take a look at the typical cash advance fee and interest rates when you withdraw money from your credit card in Australia. 

In Australia, cash advance fees are typically charged as a percentage of the amount withdrawn or as a flat fee, whichever is higher. This fee can range from around 2% to 4% of the cash advance amount, with a minimum fee of around $2 to $5. For instance, if you were to withdraw $500 as a cash advance, a 3% fee would amount to $15.

Credit card cash advances also come with higher interest rates than those applied to a regular credit card purchase. 

Important: The interest rates for cash advances can range from 20% to 30% or even higher, depending on the credit card issuer and the card's cash advance transaction terms. This is significantly higher than the interest rates for typical credit card purchases, which range from 10% to 20%.

Related: How does home loan interest work?

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Q3: What are the risks of taking out a cash advance?

Taking out a cash advance on your credit card is a risky strategy for managing debt. While it allows you to withdraw cash quickly, taking money from your credit card isn’t free. 

Here are the risks of taking out a cash advance: 

High fees 

Cash advances often have higher fees and interest rates than regular credit card transactions, worsening your credit card debt. The combination of transaction fees and immediate interest accrual can make cash advances an expensive way to borrow money and could harm your financial well-being in the long term.

Immediate interest

Your cash advance interest rate starts accruing immediately after ATM withdrawals without the grace period that applies to regular credit card purchases. This means that you'll be paying interest when you withdraw the cash.

Credit score impact 

Frequent use of cash advances and a high credit card balance can negatively impact your credit score. If you can’t manage the debt from cash advances and missed payments, your credit score could worsen. Choosing to borrow money at a low-interest rate is the best option if available to you, as it can help to reduce your monthly repayments.

Debt spiral

Relying on credit card cash advances as a regular borrowing method can lead to a cycle of increasing debt, making it difficult to get back on solid financial footing. You may be in a harmful cycle of taking out more cash advances to pay off your previous dates. This can be detrimental to your personal banking situation.

Read more: What is a bad credit score in Australia?

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Summing up

Taking out a cash advance on your credit card is an effective way to get money quickly, which is especially useful if you need an emergency fund. However, cash advances can be an expensive way to borrow. With high and immediate interest rates applied to your cash advance, you may find yourself in a debt spiral that you can’t get out of.

If you liked this article, read our related content on the Wemoney blog. We regularly post financial advice for Australians looking to take control of their personal finances. Check out our blog or read this article: “New to investing? Here are 5 things you need to know about this investing app, Webull.”

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.