You could get tempted to utilize cash advance from your credit card. Your card will come with several features, this includes one that will appear to be a little misplaced at first glance. This cash advance feature will allow borrowers to withdraw (about 90%) of the accessible credit limit as ready cash.
Even though this option is undeniably handy (it could be you want to repair the aircon, but the neighborhood mechanic accepts cash only, and its 10 days to payday). do recognize that this cash advance comes with many caveats and conditions.
Here are some reasons why you need to be super careful when utilizing the cash advance:
The Interests on Cash Advance are Higher
Getting a cash advance can increase the general interest on your credit card unless you repay everything before the following billing cycle. The reason is that the interests on the cash advance are about 29% per year. This is opposed to a usual 26% a year on most cards.
The easiest way to avoid this is in ensuring you pay back the card debt in full, ahead of the interest being charged. However, you might be losing funds because of the cash advance charges.
You Get Hard cash on Credit, With Lower Fees and Interest
When you are able to acquire a credit card, then you most certainly can access the personal loan facility or credit line. These two credit facilities will put cash straight into your account.
In all fairness, you will be charged processing fees for the personal loans. But, the loan processing costs are a lot cheaper when compared to cash advance charges, for huge loan amounts. For instance, when you want to take out S$10,000 as a loan, most personal loans will attract a fee of about S$100 or lesser. But, when you utilize the cash advance option to withdraw an amount of S$10,000, you might end up incurring a cost of S$600 in fees (6% of S$10,000).
What is more, lines of credit and personal loans are inclined to attract an interest of between 6 to 9 percent a year. You can also get the balance transfers facilities, that will offer you an interest-free time period of six to twelve months period. All these credit facilities are better options compared to the sky-high credit card cash advance rates of about 29 % per year.
Remember: when you want to take out a substantial sum of money, that you are not able to repay all in one go, do not use the credit card cash advance loan facility. Realize that there are many and better credit options for you to consider.
There are No Reward and Cashback for Utilizing Cash Advance loans
One main reason why people use the credit card cash advance is the benefits they often come with, be it the air miles, vouchers, rewards points, discounts or even cash back. But, randomly using the credit limit on your card in form of cash advance can stop you from enjoying some of these benefits.
Let us say that you get 2.5 % cashback on your credit card, then you purchase a bag worth S$250.
When you do the purchase the normal way – through charging the buy directly to your card – you will pay S$243.75 ( saving you $6.25 of the 2.5 percent cashback). Alternatively, you could receive rewards points and even other perks.
But, let us say you that you opt to obtain a cash advance since the store does not accept credit. You then withdraw S$250 through your cash advance facility, thus you incur an S$15 charge. You might end up repaying S$265 in total for the bag purchase; said differently, you will be paying an extra S$21.25 for the very same purchase.
Thus not only do you miss out on the card offer (2.5 percent cashback), you eventually have spent more money than everyone else!
Cash Advance comes with Steep Fees
For many credit cards, the charges for the cash advance are either S$15 or 6% of the cash advance amount, the amount that is higher. For instance, when you take out cash advance amounting to S$50, you will incur a charge of S$15. when you get cash advance totaling S$1,500, you will be charged S$90 (6% of S$1,500).
(Keep this in mind that the charge is S$15 on cash advances amounting to S$250 or less).
As well, take note that the fee will be charged on each cash advance that you make. It then means that the biggest mistake you can make is taking several cash advances on that credit card – the EIR (effective interest rate) would shoot through the roof!
Taking Several Cash Advances will Make Moneylenders Uneasy
Borrowers need to realize that there is one easy reason why the cash advances are a bad deal: banking institutions do not like them since they are a big risk signal.
Credit card cash advances are mostly utilized by untrustworthy individuals to access huge sums of money ahead of default, leaving the country for good or declaring bankruptcy (of course they will hide the hard cash on them).
As an alternative, cash advances often are used by individuals who will find themselves in some financial trouble and are not able to access any loans (besides those existing on the credit cards they hold).
As such, most moneylenders do get concerned when several cash advances start appearing on your report. This will cause issues in accessing other loan types approved.
Only Use the Cash Advance as the Last solution
There is little reason as to why you will need the cash advance, except for the rare unusual situations – an instance would be needed to withdraw some money while abroad since a specific merchant does not accept credit cards.
However, even then because of the large fees involved, it may be better for you to have someone pay cash to you. Also, you using a debit card to make a withdrawal of the amount you need is a much better solution for you.