Cash Advance on Credit Cards And Its Fees
What You Should Know
- Most credit cards have a cash advance, which allows users to withdraw cash from an ATM.
- A cash advance fee is associated with credit card cash withdrawals, typically $5 for a domestic cash advance and $7.50 for a foreign cash advance.
- Interest on cash advances starts accumulating on the day the cash advance was made because the grace period does not apply to cash advances.
- Cash advance APR is also often higher than the purchase APR by 2% - 5%.
What Is a Cash Advance
Most credit cards in Canada allow users to receive cash or cash-like items against their credit card limit. This credit card cash withdrawal is called a cash advance. Credit card companies charge a cash advance fee and interest on cash advances. The annual percentage rate (APR) on cash advances is usually higher than credit card purchases.
Pros And Cons of Cash Advances
| Advantages | Disadvantages |
|---|---|
| Quick Access to Cash & Cash-Like Items | Cash Advance Fee Applied |
| Use Existing Credit Limit | Higher APR |
| No Grace Period | |
| Lack of Rewards |
The most common credit card cash advance is an ATM withdrawal, but some other transactions are considered a cash advance by credit card companies. Any transaction that results in a cash-like item can be viewed as a cash advance by a credit card company.
How Does Cash Advance Work
Credit cards provide a loan on purchases a user can pay off within a grace period at no additional cost. Once the grace period expires, a credit card balance accumulates interest daily and compounds monthly. Cash advances are treated differently than regular credit card purchases.
Cash advances usually cost $5 for transactions within Canada and $7.50 for transactions outside Canada, but the actual fees depend on the card. The APR on cash advances is higher than on regular purchases, and it starts accumulating on the day the cash advance happens. Most credit card providers also allow cash advances of less than 30% - 50% of the credit card limit. This means that you may have difficulty getting a cash advance if you have a balance on your account. Lastly, cash advances do not earn rewards like credit card purchases.
The following list shows the transactions that credit card companies may view as cash advances.
Types of Credit Card Cash Advance
- ATM Withdrawals
- P2P Money Transfers
- Wire Transfers and Money Orders
- Bank Account Deposits
- Purchase of Gold and Cryptocurrency
- Purchase of Gift Cards and Prepaid Credit Cards
- Purchase of Lottery Tickets and Casino Chips
What Is Cash Advance Fee
A cash advance fee is charged directly to a credit card when a cash advance occurs. Usually, cash advances charge a fee of $5 for domestic transactions and $7.50 for international withdrawals. This fee becomes a part of the credit card cash advance balance, which means the interest starts accumulating immediately.
What Is Interest on Cash Advances
The interest rate on cash advances is usually between 17.99% and 29.99%, 2% to 5% higher than the credit card purchase rate. Most credit cards do not offer a grace period on cash advances, which means the interest rate starts to accrue as soon as the transaction happens. If you plan to keep your cash advance balance for a while, estimate the credit card interest you will have to pay off over time before proceeding. If you miss 2 payments, your APR may increase by a few percentage points.
Even though the cash advance fee and the interest rate charged on the cash advance are the only costs from the lender’s side, there are other costs that a borrower may incur.
Other Costs of Cash Advance
The most common forms of cash advances come with additional fees not mentioned above. An ATM withdrawal with a credit card usually charges an additional fee by the company operating the machine. Usually, the ATM fee in Canada can reach up to $3.50 per withdrawal. This fee is added to the cash advance and is usually shown as the same transaction. You will likely be charged a foreign exchange fee if you withdraw a foreign currency with an ATM unless you have a no FX fee credit card. These costs may add up very quickly, especially for small withdrawals.
Other cash advance methods, such as money transfer apps, gift cards, or purchases of other assets, may also have some fees. Money transfer apps like PayPal have a transfer fee of as high as 5%, meaning it is just as expensive to transfer large amounts as transferring small amounts. Prepaid cards usually have an activation fee of up to $7.50. Various trading platforms that allow you to buy cryptocurrency, gold, and other assets may have a fee to top up the trading account with a credit card.
Best Cash Advance on Credit Cards
| Credit Card Name | Annual Fee | Cash Advance Fee | Cash Advance Interest |
|---|---|---|---|
| Desjardins Flexi Visa | $0 | $0 | 12.90% |
| HSBC +Rewards Mastercard | $25 | $5 | 11.90% |
| RBC Visa Classic Low Rate Option | $20 | $5 | 12.99% |
| Scotiabank Value Visa Card | $29 | $5 | 12.99% |
| American Express Essential Credit Card | $25 | $10 | 12.99% |
| NBC Syncro Mastercard | $35 | $0 | 15.20% |
Other Types of Cash Advances
Credit card cash advance is the most popular option, but two other options are worth mentioning. Payday loans are available to most people with income, but you should be cautious with payday loans because of their high APRs. Merchant cash advances are available only to small business owners and are based on future projected sales.
Payday Loans
Payday loans are considered loans for bad credit because they are available for most people with any income. Payday loan officers require proof of income, such as a previous paystub, but they usually issue loans for any credit score. Payday loans can be very predatory because the interest rates for these loans can often exceed 40% and be up to 300%.
Payday loans are short-term loans paid off within 2 to 4 weeks but are extremely expensive. Anyone considering using payday loans should only use it as a last resort. Credit card cash advance or its alternatives almost always have better terms than a payday loan.
Merchant Cash Advance
Merchant cash advances are usually offered to small business owners by the banks they work with. These cash advances are a viable option for small business financing as they usually have clear repayment terms. Depending on your projected sales, the bank offers a factor to estimate your repayment amount.
For example, if you borrow $10,000 at a factor of 1.25, you must repay $12,500 plus origination fees. This means that a factor of 1.25 represents an interest rate of 25% if the repayment happens over one year.
The repayment factor may change depending on your sales on a given day, which may change your interest on the loan.
Cash Advance Alternatives
Credit Card Purchase
Check if you can pay your bill with a credit card. If you can cover what you need the cash for with a credit card, you should use the credit card. If you do not have to withdraw money, you can avoid cash advance fees, get a grace period to pay off your balance, and get rewards.
Use Your Savings
If an emergency requires you to withdraw cash, consider your savings first. You will not incur the fees and interest from the cash advance if you withdraw your savings. You will also have to pay off your cash advance and all the expenses that come with it. Taking money from a savings account is usually cheaper than withdrawing from a credit card.
Overdraft Protection
Most banks in Canada offer overdraft protection to chequing accounts. Overdraft protection allows you to have a negative balance in your chequing account. Depending on your package, an overdraft may cost you some money, but it allows you to withdraw cash even if you do not have money in your account. You should check with your bank about fees and other penalties you incur for an overdraft and consider whether it is the best option.
Personal loan
Large banks also offer unsecured personal loans to people with a good credit history and income. Personal loans can be a good option for people who need a large amount of cash, but it may take some time to be approved and transferred. Generally, personal loans are not cheap, but they are often better alternatives than cash advances for large transactions.
Line of Credit
Line of credit allows you to get revolving credit at a relatively cheap interest rate. There are different types of lines of credit available, including unsecured (ULOC), secured, and home equity (HELOC). It is easier to receive an unsecured line of credit, but the HELOC has the lowest interest rates. Similar to personal loans, lines of credit may take time to be approved for, but it is one of the best alternatives to cash advances in terms of cost.
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