When you are in need of cash that you do not have, it is possible that you will not take the time to carefully consider the many methods by which you may get it. If your need is significant, you may, for instance, take out a cash advance on your credit card without giving any thought to the interest that would be charged on the cash advance or how you would pay it back. The following is an explanation of how interest on a cash advance is calculated, as well as some tips on how to keep it to a minimum.
KEY TAKEAWAYS
Cash advances are handled differently by credit card providers compared to standard transactions made using credit cards.
Advances on cash are subject to surcharges from credit card providers.
When you use a credit card for cash withdrawals, the interest rate on that card may be different than the rate you pay when you use it as a credit card.
When it comes to cash advances made using a credit card, interest begins to accumulate not at the conclusion of the grace period but rather on the day of the transaction.
Before agreeing to the conditions of a cash advance, customers should carefully go through the agreement in its entirety.
What Exactly Is Meant of Getting a Cash Advance With a Credit Card?
Your credit card company may offer you the option to get quick cash in the form of a cash advance. It is quite similar to a payday loan, with the key difference being that the money is not advanced against your salary but rather against the line of credit on your card. In one sense, a cash advance functions in the same manner as any other purchase that you make with your credit card; but, instead of “purchasing” things or services, you are “buying” cash in this scenario.
The majority of individuals are unaware that your credit card company processes cash advances in a manner that is distinct from the manner in which it processes credit for purchases. Using your credit card to make purchases of goods or services is not the same thing as taking out a cash advance.
There is a possibility that, among other things, the interest rate on cash advances will be increased, and there may also be a transaction charge. When compared to other methods of obtaining a rapid loan, such as a payday loan, which must be paid back, often by the time you get your next salary, a cash advance may still make more sense to obtain.
The Step-by-Step Guide to Getting a Cash Advance from Your Credit Card
Cardholders may get cash advances by visiting an automated teller machine, a bank, or another financial institution, or by asking the credit card issuer for a check. In point of fact, certain card issuers may sometimes send checks to users’ homes in the mail as an enticement for them to use their credit cards to get a cash advance. Check the terms and conditions of your credit card to learn your cash advance limit as well as the amount of credit that is available to you for use with cash advances.
What could possibly go wrong if the card company extends an invitation to you to obtain a cash advance? It’s likely that you are already familiar with the comprehensive response to that query. However, the devil is in the details, and before you activate your cash advance option, you need to have a complete understanding of what you are getting yourself into.
Comparing Cash Advances on Credit Cards to Regular Purchases
The interest that is charged on cash advances is handled differently by credit card issuers compared to the interest that is charged on purchases made with the card. There is a distinction between the terminology used for cash advances and purchases made using a credit card. To begin, the interest rate on a cash advance will often be several percentage points more than the standard rate.
Additionally, any special interest-rate promotions that may be associated with the card, such as deferred interest until a specific date, may not be applied to cash advances, which means that you run the risk of being charged an unexpected fee.
Credit card issuers, in addition to charging an interest rate that is higher than what is typical, will also automatically impose a transaction fee on the advanced cash. This cost may range anywhere from 3% to 5%, or it can be a flat rate of $10, whichever is larger. In addition to this, most of the time cash advances do not qualify for rewards, cash-back programs, or any other perks associated with credit cards. It is nearly usually regarded to be a different entity from the rest of your credit balance whenever you have a cash advance line.
If it is a special offer, the section that you should examine is the part that is detailed on the card’s website or in the materials that were sent to you when you signed up for the card. You may discover the specifics of your card by visiting any of these locations.
How Does the Interest Work When You Get a Cash Advance on Your Credit Card?
As was just said, the interest rates that are applied to cash advances are not the same as the rates that are applied to purchases. Not only is the interest rate for cash advances often greater than other types of loans, but there is also no grace period, which means that interest will begin to accumulate on the transaction date itself.
Even if you pay off your cash advance in full and have no debt for that billing cycle, you will still be required to pay interest on the amount you borrowed.
You also have the option of paying back the cash advance over a period of time, similar to how you may pay off a purchase, so long as you meet the required minimum payment amount each month.
The Methods That Are Employed To Apply for Your Payments
Because of the Credit Card Act of 2009, any credit card payments made in excess of the required minimum amount are applied to balances with the highest interest rates first. This marked a significant shift in how credit card firms are able to process payments (previously companies could apply payments to lower-interest purchases).
Let’s say you have a balance of $5,000 on a credit card that has a special annual percentage rate (APR) of 10% and you intend to pay it off over the course of 15 months. During this time, you decide to take out a cash advance for $500, which results in interest at a rate of 22.5%. The total amount of interest you pay on your balance will be $6,500. It’s possible that your payment may be distributed among many balances, depending on how much you send in.
If you just make the minimum monthly payment that is necessary, it is quite likely that the payment will be allocated to the $5,000 amount; nonetheless, the credit card issuer has the last say in this matter. Given that it is dependent on the procedures followed by the issuer, it is probably a good idea to check in with them on the payment. Because you currently have a debt on your credit card, you will need to make payments that are higher than the minimum in order to pay off the cash advance in a shorter amount of time.
It is recommended to use the credit card itself instead.
Make an effort to make use of the credit card itself rather than getting a cash advance. If there is anything that has to be paid for and you absolutely cannot use a credit card to do so, take out a cash advance that is as minimal as possible to decrease the number of interest charges you will have to pay and make sure to pay off your debt as promptly as you possibly can.
The Crux of the Matter
Cash advances, much like balance transfers, have the potential to be a useful resource in certain situations. Before moving forward with these transactions, however, it is essential for customers to have a solid understanding of the conditions of the agreement, including any applicable interest rates and one-time costs. If you do not handle your high-interest cash advance loan in a suitable manner, it is possible that you may be saddled with it for a very long time.