Credit card cash advance: Meaning, benefits, and drawbacks you should know

In the nation’s rapidly evolving economy, many credit card holders turn to cash advances when faced with sudden liquidity problems. Still, before you swipe your credit card at an ATM, it is critical for you to understand the basic concept behind this feature, its pros and cons, along with several factors you must keep in mind before proceeding with a cash advance.

Manish Shara, Co-founder and CEO, ZET, says, “A cash advance allows cardholders to withdraw cash using their credit card, offering quick access to funds when needed. While it provides instant liquidity, it’s also one of the costliest forms of credit. Unlike regular transactions, there’s no interest-free period, and hefty fees begin to accrue immediately. For many first-time credit users, this distinction isn’t always clear. Strengthening financial awareness around such features is essential to building responsible credit behaviour and long-term financial confidence.”

Furthermore, the withdrawn amount is deducted from your credit limit, but comes with:

• A cash advance fee. This particular fee is usually between 2.5% and 3% of the total amount or a fixed minimum charge that the credit card holder is required to pay.
• Unlike regular purchases that are provided a well-defined grace period by the credit card issuing institution, a cash advance results in immediate interest accrual. Such a feature can make the entire exercise extremely costly for the credit card holder.
• This also comes with a cash withdrawal limit, generally 20-40% of your total card limit. These limits are put in place to ensure that the overall debt can be managed efficiently by the borrower.

Pros of a cash advance

1. Instant cash access: This feature is particularly useful during sudden, unforeseen financial emergencies when the credit card holder lacks the required funds and traditional loans are not feasible.
2. No documentation required: To obtain money through a cash advance, no new documents are required, unlike those needed for personal loans or home loans.
3. 24/7 availability of funds: Aspiring borrowers can obtain funds through working ATM machines, anywhere in the country or even abroad.
   
4. No distinct loan approval: There is no requirement for a credit score or a background credit check to clear the loan. It can be simply obtained in a hassle-free manner.
5. Flexible usage: The credit card issuing institution generally permits cardholders to use the withdrawn amount for any particular purpose or financial emergency, such as surgeries, rent, other medical expenses, or even travel.

Cons of a cash advance

1. High interest rates: The total interest charged on cash advances is very high. It is in the range of 35-45% per annum. It also starts accruing immediately upon the withdrawal of funds by the credit card holder.
2. Transaction fees: Not only this, but the cash advance fees and ATM charges can raise your overall cost sharply.
3. No interest-free period: Different from normal credit card purchases, you will pay interest from day one. This makes the entire idea complicated and expensive to practice in day-to-day life.
4. No reward benefits: There are no direct or indirect economic benefits of a cash advance. These cash advances do not earn cash back or loyalty points, which can help the credit card holder boost their credit scores or credit profiles in any way.
5. Negative credit impact: High credit utilisation and unpaid balances can lower your credit score. This is because rapidly accumulating debt can easily spiral out of control, and it can also be emotionally draining for the credit card holder if the cash advance is not repaid within the stipulated time.

A cash advance can be a quick fix, but it should not become a financial habit. One should use it only for genuine emergencies and repay promptly to avoid compounding of interest. For meeting planned expenses, one should proceed with a personal loan or BNPL options after conducting proper due diligence and consulting with a certified financial advisor. These options are more credit-friendly and affordable.

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Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards, and credit scores. Mint does not promote or encourage taking credit, as it comes with risks such as high interest rates and hidden charges. We advise investors to discuss with certified experts before taking any credit.