Cash advance

Definition

A cash advance refers to a financial service provided by banks, credit card companies, and some other financial institutions. It allows cardholders or account holders to withdraw a specific amount of money from an ATM or a bank branch using their credit card or debit card.

What is cash advance?

This withdrawal is typically a portion of the cardholder’s credit limit (in the case of a credit card) or a portion of the available balance (in the case of a debit card).

A cash advance provides quick access to cash, which can be useful in situations where physical currency is needed urgently, such as when travelling or during emergencies.

Cash advances usually come with high fees and interest rates. Unlike regular card purchases, which may have a grace period before interest accrues, cash advances often start accumulating interest immediately.

A cash advance is not the same as a loan. It’s essentially a short-term borrowing against the credit limit of a card, and the terms and conditions are specific to the credit card issuer.

Taking a cash advance can lead to debt accumulation if not managed carefully. Due to the high costs associated with cash advances, it’s generally advisable to consider alternative options for obtaining cash, such as using a personal loan or savings.

Some credit cards may have a separate cash advance limit, which may be lower than the overall credit limit. This is an important consideration to be aware of before attempting a cash advance.

Example of cash advance

Sarah is a credit cardholder with a £5,000 credit limit on her card. She has an unexpected expense and needs immediate cash.

1. Cash advance request:
   • Sarah decides to use a cash advance from her credit card. She visits an ATM and requests a cash advance of £500.
2. Cash advance fee:
   • Credit card companies typically charge a cash advance fee, which is a percentage of the total cash advance amount. Let’s say the cash advance fee is 5%.
3. Total amount charged:
   • In addition to the £500 cash advance, Sarah incurs a cash advance fee of 5% on the transaction. The total amount charged to her credit card account is £500 + (0.05 x £500) = £525.