Beware the credit card cash advance

This post by Manshu originally appeared at partner blog The Dough Roller.

Almost every credit card gives you the ability to take a cash advance. You can withdraw cash from a credit card simply by using it at an ATM machine. But there are several things about this that you should keep in mind.

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I was reminded of these things recently, when a friend took a small cash advance from his credit card, and faced a whole lot of costs he wasn’t aware of.

Higher APR. The cash-advance APR for a credit card is usually much higher than the regular APR of the card. For example, the Disney Visa credit card has a regular APR between 13.24% and 16.24%, but a cash-advance APR of 19.24%.

Cash-advance fee. Most credit cards will charge you a fee when you take a cash advance. For example, the Chase Sapphire credit card charges a transaction fee of 3% or $10, whichever is higher, when you take a cash advance. If you withdraw $100 as a cash advance, you will get a net of $90 after taking into account the cash- advance fee. The fee will either be charged upfront, or when your balance is due (depending on the credit card terms).

Payment may be applied to a low APR balance first. Some credit cards apply your payments toward a balance with a lower APR first, before moving to a higher-APR balance.

Let’s look at this with an example: Suppose you have a credit card that has an APR of 16.24% on regular purchases, and 19.24% on cash advances. You buy stuff worth $100 and take a cash advance of $100. You pay $100 when your balance becomes due. Some credit cards will apply this money toward the lower-APR balance first. This means they will use the money to clear off the balance created with the regular purchases, so you will still have $100 outstanding from your cash advance, on which interest will be charged at a higher rate of 19.24%.

To avoid this situation, use a credit card with no outstanding balance to get a cash advance if you absolutely need one. With the new credit card regulation changes, credit card companies will not be able to follow that practice any longer. Until then, you need to keep this in mind and protect yourself from the extra cost.

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Cash advances don’t have a grace period. Credit card companies usually don’t allow a grace period for cash advances. This means that interest starts piling up as soon as you take the cash advance. Most people are used to shopping with their credit cards and then paying the bill when their statement arrives. This is not good if you have taken a cash advance because interest keeps adding up every day you don’t pay it off. The key here is not to wait for the balance to be due, and pay off whatever you can, as soon as you can.

The best option is to avoid cash advances, as the high costs truly makes it an option of last resort. But, sometimes, despite our best intentions, things become a bit tight, and we are forced to do things we don’t like. Next time you take a cash advance, keep these tips in mind.

Related reading at The Dough Roller:

• Balance transfers vs. cash advances
• Building a sound asset allocation plan
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