Contributed by Credit Bureau (Singapore)
A cash advance allows you to withdraw cash or a cash equivalent using your credit card. Cash advance transactions include getting money out at an ATM, transferring funds from your credit card to any bank account instantly and withdrawing cash from any local bank branches.
When you need some extra cash to see you through an emergency, go on a well-deserved holiday or furnish your new home, you can request for any amount up to your available credit limit — and you’ll receive it in your account immediately. It is easy to take out a cash advance from your credit limit but before doing so, here are 3 things you should know before you get cash out of your credit card.
1. Cash Advance is a short-term loan
The option to get cash from your credit card may sound tempting, especially if you're low on cash, but a cash advance is not the same as withdrawing cash using your debit card. In reality, credit card cash advances are short-term loans against your credit card’s credit limit. This loan is on a revolving basis, which means that you are being charged interest on the outstanding amount from the second you withdraw money at the ATM. As such, it can be expensive and may eventually lead to credit card debt if you do not repay on time.
2. Fees involved for withdrawal
Most credit cards charge a fee when you withdraw cash, which is calculated as a percentage of the amount you take out. They typically charge about 6% or $15, whichever is greater for each cash advance transaction. On top of the cash withdrawal fees, interest is incurred and compounded on a daily basis. For example, if you had taken out a loan of $3,000 from your credit card at 28% interest per annum and you took a year to pay it back, the interest would not be plain simple at $840, but at a compounded interest of $968.96 after a year.
3. It will be visible in your credit report
Seeing a cash advance in your credit report will not necessarily stop a lender from accepting your credit application. However, it could also pose as a red flag to some as they might think that you are cash strapped or struggling with finances if you have to withdraw cash on your credit card. If you are planning to apply for big ticket items, you may wish to consider avoiding making cash advances on your credit card as you do not want to run the risk of putting off lenders when they pull your credit report for credit assessment.
While cash advances provide ease of accessibility and convenience, it should be done with caution as your credit reputation could be impacted in many ways if excessive withdrawals take place.