Avoid These 3 Credit Card Cash Advance Mistakes

Avoid These 3 Common Credit Card Cash Advance Mistakes

Cash advances on credit cards can be a lifesaver in emergencies, but they're not cheap. Find out how they work, typical fees and key mistakes to avoid so you don’t wind up in a debt trap.

When you’re in a financial bind and need cash quickly, taking out a cash advance on your credit card might seem like the only choice.

Although it’s useful in emergencies, a cash advance comes with hefty fees and interest rates that could put you deeper in debt. That’s why experts say cash advances should be a last-resort option.

Before you take out a cash advance, understand how they work, the fees involved and other options that may be better for your wallet.

What is a credit card cash advance, anyway?

A credit card cash advance is like a short-term loan from your bank or card issuer, usually for $1,000 or less. Unlike credit card purchases that offer a grace period for interest-free repayment, cash advances accrue interest immediately until the amount is repaid in full.

Most credit card issuers limit cash advances — the amount cannot exceed your total credit limit. When you get a cash advance, your credit utilization ratio will increase, too.

Some transactions are considered cash advances even if you don’t withdraw funds. For example, the National Bank of Canada considers the following transactions to be cash advances:

Transferring funds from your credit card to your bank account at an ATM.
Balance transfers from one credit card to another.
Online money transfers.
Adding money to a digital wallet.
Online lottery and gambling.
Overdraft protection.

How credit card cash advances work

Here’s the three-step process to access a credit card cash advance and the fees involved.

Step one: Initiate the cash advance. You’ll visit either an ATM or a bank branch, or request a convenience cheque to request a cash advance for a specific dollar amount. There’s no credit check involved.

Step two: Pay fees. Issuers may charge a flat fee per cash advance, typically about $5 within Canada and $7.50 for foreign transactions, according to the Financial Consumer Agency of Canada (FCAC). However, some issuers charge their fee as a percentage of the cash advance amount, usually between 3% to 5%, according to Consolidated Credit Canada, a national credit counselling agency. You might also pay a flat withdrawal fee (usually a few dollars) at an ATM.

Step three: Repay the cash advance (with interest). Interest on cash advances begin accumulating immediately, usually at a higher interest rate than your card’s annual percentage rate (APR) for purchases. The typical interest rate on cash advances in Canada is about 24%, compared to standard credit card purchase APRs of 19% to 20%. (These interest rates will vary by financial institution.)

Common cash advance credit card mistakes to avoid

Before taking out a credit card cash advance, know what you’re signing up for to avoid costly financial consequences. Here are some common mistakes to avoid.

1. Overextending your credit usage

A cash advance will add to your outstanding credit card balance, so be careful not to max out your available credit limit. Additionally, this can indirectly impact your credit score by increasing your debt load, John Iaconetti, a certified financial planner with Assante Capital Management in Thornhill, Ontario, said in an email interview.

“You can max out your cash advance limit on a card separate from the card purchase limit. If you factor in the higher accrued interest on a cash advance, Canadians can be put in a spot where they cannot pay back their credit card because they should focus on paying back the cash advance first,” Iaconetti said.

2. Not having a repayment plan in place

Since interest accrues from day one when you take out a cash advance, it’s critical to repay the amount withdrawn as soon as you can. Otherwise, the costs add up fast.

For example, say you take out a $1,000 cash advance with a 24% annual interest rate and 3% fee per cash advance. After just two weeks, the cash advance will have accrued roughly $39 in interest and fees, on top of the $1,000 you owe. Taking just a couple of months to pay back the advance could quickly lead to hundreds in interest in fees.

3. Using cash advances for non-emergencies

Because of the potential cost, a cash advance shouldn’t be used for regular, non-urgent expenses, says Jeffrey Schwartz, executive director of Consolidated Credit Canada, a credit counselling company based in Toronto. Misusing cash advances instead of building an emergency fund could put you into a continuous debt-trap cycle of overspending.

“One of our biggest concerns, especially as a credit counselling agency, is that this is really not a long-term solution,” Schwartz says. “And if this keeps coming up, then consumers should really review their budget as to why they’re needing these emergency funds, especially, in most cases, because they don’t have a real plan on how they’re going to pay the money back.”

Alternatives to a credit card cash advance

To avoid using a cash advance in non-emergency situations, it can help to familiarize yourself with other ways to cover expenses.

Build your savings. An emergency fund can provide a financial safety net for unexpected expenses without tapping high-interest forms of borrowing. Canadians should strive to save three to six months’ worth of living expenses in an easily accessible account to cover emergency expenses.
Ask about a payment plan. Instead of going into debt to pay an emergency expense, see if the creditor is open to a repayment plan with fixed monthly payments spread out over time. For instance, medical providers typically offer this option. This gives you time to repay what you owe without taking out a cash advance or other type of high-interest loan.
Consider a line of credit. A line of credit typically has flexible payment terms and lower interest rates than a cash advance, and you can use the line repeatedly. Plus, a line of credit could help you consolidate higher-interest debt at a lower rate of interest, saving you money in the long run.
Apply for a personal loan. A personal loan can be either unsecured or secured and is paid out in a lump sum. You repay the loan in fixed monthly installments at a set interest rate that’s usually much lower than the rate on a credit card cash advance.