If you’re in a financial bind and in need of some quick cash, a credit card cash advance can seem like a simple solution. Insert your credit card into the nearest ATM and gain access to paper money – just like you would with a debit card, right? Wrong.
Credit card cash advances may be convenient, but they are costly and starkly different from a regular credit card transaction or a traditional cash withdrawal you would make with a debit card.
What is a credit card cash advance?
A credit card cash advance is an easy (but expensive) way to borrow money in the form of cash from your credit card issuer.
Here’s how it works: you insert your credit card into an ATM and withdraw cash. Unlike a cash withdrawal from a debit card however, the money you take out from a credit card cash advance isn’t yours – it’s money you’re borrowing from your credit card’s limit that must be paid back in full with interest. One way to think of a cash advance is as a short-term cash loan you can access through your credit card. Another is to picture that you’re using your credit card to “buy” cash.
Credit card cash advances are rarely recommended (except in instances of emergencies when paper money is required) as they’re accompanied with high fees and are more expensive than regular purchases you would make with a credit card.
Below, we outline five facts about credit card cash advances and why they should be avoided.
The cons of credit card cash advances
1.) Credit card cash advances have no grace period
When using a credit card for regular purchases, you can avoid interest charges if you pay off your balance in full by the date indicated on your monthly statement. Most cards offer a 21-day grace period from when you receive your monthly statement to when your balance is due, during which you can pay back what you owe without incurring any interest.
This is not the case with cash advances, which do not follow the traditional credit card billing cycle. With a cash advance, you’ll start accruing interest charges immediately, from the moment you pull out money from the ATM, with no grace period or interest-free window.
2.) Credit card cash advances charge a higher interest rate
Not only do interest charges on cash advances kick in immediately with no grace period, but the interest rate on cash withdrawals also tend to be higher compared to other credit card transactions.
For most credit cards, you’ll pay an annual (purchase) interest rate of 19.99% on any balance you don’t pay off in full. In comparison, the annual interest rate on cash advances can climb to upwards of 22.9%, and in some cases, 24.99%. That three to five percentage point difference can add up, especially if you require a long time to pay back your cash advance. Not to mention, the interest rate you pay on your cash advance can increase if you regularly miss payments or have an account in bad standing (although you may be able to negotiate these terms with your card issuer’s customer service team).
3.) You may have to pay additional upfront fees
Along with interest payments, credit card cash advances often include additional upfront fees. These cash advances fees are either charged as a flat-rate or are calculated as a percentage of the amount of money withdrawn (and are often accompanied with conditions that stipulate you can be charged a minimum or maximum amount).
For example, if a card issuer charges 1% of the withdrawn amount with a minimum fee of $3.50 and a maximum of $10 and you withdraw $500, you’d pay $5 just for the convenience of accessing the money.
You may also be hit with other minor withdrawal fees such as in the case you use an ATM that is not associated with your bank or card issuer or get a cash advance outside of the county. Fee amounts and structures do vary from one financial institution to the other, so make sure to read the terms and conditions of your card agreement or check with your card issuer’s customer service team.
4.) You can’t earn rewards on a credit card cash advance
With some of the best credit cards in Canada, you can get upwards of 4% in cash back or travel points per dollar you spend on eligible everyday purchases such as gas or groceries. However, when it comes to cash advances, you’ll earn absolutely no rewards.
The terms and conditions for the majority of credit cards explicitly exclude cash advances as an eligible “purchase” – which means you will not be able to offset even a small portion of the cost of interest payment by earning rewards when paying back your cash advance.
5.) Cash advances can (indirectly) hurt your credit score
When using a credit card cash advance, you are borrowing money from the bank or your card issuer (on top of any money you already owe on your card for making regular purchases and any other loans you have).
The more ways you borrow money, the more vulnerable you could be to missing a payment and potentially hurting your credit score down the line. This may be particularly true for cash advances, which charge higher interest amounts and therefore can make it more difficult to pay back what you owe on time.
Cash advances can also negatively impact your credit score by increasing how much money you’re borrowing relative to your overall credit limit, also known as your credit utilization rate. Generally speaking, you only want to borrow 30% of your overall limit to get a good credit score, which may be a harder target to hit if you suddenly withdraw a large credit card cash advance.
You should avoid credit card cash advances, but…
As highlighted above, there are plenty of cons to using a credit card cash advance and they should be avoided as much as possible. With that said, cash advances offer a fast and easy way to access paper money with no additional paperwork or qualification requirements and without having to leverage any of your assets. In cases of extreme emergencies where you have no alternatives (including borrowing cash from friends or family) and have a plan to pay back what you withdrew, a cash advance can prove helpful.
If you are going to get a credit card cash advance, it’s best not to use a typical rewards credit card but a low interest credit card instead. While most rewards cards charge upwards of 24.99% on cash advances, some of the best low interest credit cards in Canada charge considerably more affordable rates.
Ratehub.ca’s best cash advance credit cards in Canada
American Express Essential Credit Card
The American Express Essential Credit Card charges only 8.99% on cash advances – the lowest fixed rate on cash advances of any credit card in Canada. The card also has no annual fees, so it’s free to carry, and charges the same low rate of 8.99% on regular purchases and balance transfers. These factors combined makes the American Express Essential Card a great all-around card to have in case of emergencies and helped to propel it to the top of our list of the best low interest credit card in Canada for 2019.
This card also offers accountholders with a slew of additional benefits including a balance transfer offer of 1.99% for their first six months, purchase protections and early access to a number of concerts through American Express Invites.
RBC Visa Classic Low Rate Option
For a nominal $20 annual fee, this card charges 11.99% on cash advances. The low 11.99% rate also applies to regular purchases and balance transfers.
With the BMO Preferred Rate Mastercard, you’ll pay a low interest rate of 12.99% on everything including cash advances, balance transfers and any balance you carry over. You’ll also get access to some additional perks including extended warranty and purchase protection as well as a lengthy nine-month promotional rate on balance transfers of 3.99%.
The Scotiabank Value Visa roundups our list of the top credit cards for cash advances. Along with a 12.99% rate on cash advances, purchases and balance transfers, it’s also one of Canada’s best balance transfer credit cards thanks to its low promotional rate of 0.99% for the first six months. The card also includes some ancillary benefits such as discounts on rental cars at select AVIS locations. The card does charge a $29 annual fee, but you could walk away with more in savings when factoring in the lower interest rate this card charges.
Alternatives to credit card cash advances
There are a number of alternatives to credit card cash advances – each with their own pros and cons – that you may want to consider, including the following:
- Personal loan: if you have a strong credit score and a good track record of paying back debts with your bank, you could secure a better rate and terms from your bank by asking for a personal loan;
- Chequing Account Overdraft – you could apply for an overdraft and use your debit card to withdraw more money than you have in your chequing account for a fee from your bank;
- A loan from friends and family – negotiating favourable terms can be considerably easier when borrowing money from people you know. However, there can be consequences to mixing loved ones with your personal financial affairs;
- Group RRSP – if you’ve been investing your money in a workplace RRSP fund, you can withdraw a portion of the money you need early. The consequence here is that you will be charged tax on your investment for pulling out money prior to retirement; and
- Home equity line of credit (Heloc) – if you’re a homeowner, you can leverage your property as an asset and get access to new funds at a much low rate through a HELOC. It’s worth noting that HELOCs are often reserved for large loans for significant costs rather than smaller emergencies that could be covered under a credit card cash advance.
No matter which avenue you chose, a credit card cash advance or a personal business loan, it will come at a cost. Therefore, it’s critical that you always budget your expenses and ensure you save money over time and build up a “rainy-day fund” in case you need to cover the cost of a sudden emergency.
Flickr: William Grootonk