Things you need to know before you take a credit card cash advance

Last Updated: Thu, Sep 27, 2018 16:40 hrs

While credit cards are mostly used to make payments at a merchant's outlet using a POS (point of sale) terminal or through payment gateways, in case you are short on cash and need it urgently, you can use your card for withdrawing money from an ATM. Known as cash advance, this facility is available in almost all credit cards to aid users in situations when they need cash. Though a utility service, there are certain things you need to know before taking a credit card cash advance.


Cash advance is different from non-cash transaction

Cash advance is very different from a non-cash transaction. Generally, when you use your credit card for a non-cash transaction, you get a minimum period within which you need to pay the money borrowed from your card. During this period, which differs across financial institutions, no interest is charged. Interest is charged only after you make payments after the interest-free period is over. However, in case of a cash advance, interest is levied right from the moment/day you make a withdrawal. Also, interest is levied on each withdrawal along with service charges, applicable taxes and ATM withdrawal fee. So, the amount you need to repay is much higher than what you've withdrawn.

Cash advance is a sub-limit of your credit card limit

It is essential to note that you can’t withdraw any amount you wish to from an ATM, using your credit card. Cash advance is a sub-limit of your card’s limit and depends on your creditworthiness and the type of card you own. While this limit is lower for entry-level cards, it’s higher for premium cards.

For example, if you have an entry-level card with a credit limit of Rs.30,000, the cash advance limit could be Rs.1,000 or Rs.2,000. On the other hand, for a premium card with a limit of Rs.1 lakh, the cash advance limit could be Rs.5,000 or Rs.10,000. This varies across financial institutions.

Cash advance limit can change

Note that the financial institutions do reserve the right to change your cash advance limit based on your credit profile and spending patterns. In case you are a responsible user, repaying the outstanding amount on time, the cash advance can go up and vice-versa. Note that the cash advance limits and the applicable interest rates are told by the card issuing company in advance. At the same time, any changes made are communicated on a periodic basis via SMS or email.

Should you use cash advance?

Ideally you shouldn’t, except in an extreme situation. This is because not only do you need to pay back a higher amount, but your failure to do so can severely affect your credit score that may jeopardise chances of availing loans in the future. Also, if you delay payments for several months and years, and pay just the minimum amount, it results in a huge interest outgo.

The solution

Sometimes, there are situations where withdrawals from ATMs using credit cards can’t be avoided. In such a scenario, it’s prudent to have a card that offers you interest-free withdrawals from ATMs. For instance, the Bajaj Finserv RBL Bank SuperCard allows interest-free cash withdrawals from ATMs for up to 50 days, charging only a 2.5% processing fee. Also, it allows you to convert the limit into a personal loan in case of an emergency and get cash up to 90 days.

Therefore, along with knowing the process of how to take a credit card, it’s important for you to be aware of the cash advance limit and its pros and cons.