When Is it Smart to Take a Cash Advance? 6 Things to Consider

In the Philippines, credit cards are experiencing a surge in popularity, overcoming decades of market resistance and gaining mainstream adoption. Where they were once often viewed as a potentially dangerous frivolity, they are now being recognized as powerful financial tools that offer their holders a new level of convenience and financial security. 

However, while most people now understand the value of using credit cards in making regular purchases, taking cash advances remains a controversial practice. A credit card advance allows cardholders to withdraw cash against their credit line, which is like taking out a type of special unsecured loan. As a rule, these borrowings are assessed differently from regular card purchases, with higher fees and stricter payment plans.

The main appeal of cash advances is that they give you extra funding after just a quick trip to an ATM or with a few taps on your card’s app—a level of convenience that no other type of loan can offer. This convenience can make them the best possible choice in many kinds of emergencies; however, their inherent tradeoffs may make you think twice.

Ultimately, it’s up to you to decide whether a cash advance is worthwhile. If you find yourself in a financial pinch, take these considerations into mind before taking a cash advance on your credit card:

1. Limited Withdrawal Amounts

Not all credit cards offer cash advances and, of those that do, the amounts are usually limited to a percentage of your total credit limit. The cash advance limit in credit card offers can vary according to the provider but it’s seldom the full credit limit. This means that, unless you have a fairly high line of credit, cash advances alone will not be enough to cover serious cash crunches.

2. Higher Interest Rates Compared to Regular Transactions

Cash advances almost always come with interest rates higher than those for regular credit card purchases. Also, unlike regular purchases, interest often starts accruing immediately without the usual grace period. These additional restrictions are a reflection of the elevated risks that card providers need to take on when they lend out cash.

3. Cash Advance Fees

Most credit card products charge a fee for cash advances, usually a percentage of the amount you withdraw. It’s not unusual for these percentages to be as high as 5% or even higher. Even at the lower end of the spectrum, making cash advances is generally one of the most expensive options for obtaining money quickly.

4. Instant Impacts on Credit Rating

Aside from increasing your card balance, taking out a cash advance immediately affects your credit utilization ratio and other factors in your credit score. Taking too many advances or taking a large enough amount to push your limit could harm your creditworthiness, resulting in more limited financing options in the immediate future.

5. No Rewards

If you take out a cash advance on a rewards-based card, chances are you won’t earn any reward points for it. If you rely on reward cards to stretch your spending, the interest and fees of cash advances can easily negate the value of your hard-earned rewards.

6. Elevated Chances of Debt Spirals

Even small cash advances can easily become unmanageable after just a couple of missed payments because of their high fees and interest rates. If you must use this option, use it sparingly and only when you are confident that you can repay the balance before the due date.

Situations Where a Cash Advance Makes Sense

Despite the downsides, cash advances can still be extremely valuable, assuring you that you have a way to take care of temporary cash shortages. Cash advances on your card are usually warranted in the following scenarios:

• Sudden Medical Emergency Bills. Accidents and health issues can arise at any time, including in between jobs and paychecks. If you suddenly find yourself needing expensive medical care, a credit card cash advance will provide money to cover more immediate hospital bills.
• Travel Emergencies. If you find yourself stuck in a foreign country without any cash, a cash advance can be a lifesaver. As mentioned earlier, cash advances can often be facilitated through ATMs, and these may be able to provide you with the local currency needed to make critical cash-only purchases.
• Avoiding Late Payments on Essential Bills. If you’re close to missing a payment deadline for rent or utilities, a cash advance can help you avoid late fees or service interruptions. Indeed, in some circumstances, cash advance fees may be smaller than the penalties you’ll incur for non-payment of bills.

Sometimes, a Cash Advance is Your Best Bet

So long as cash remains king, cash advances will continue to be an invaluable perk of owning the right credit card. However, just because you can take out cash advances doesn’t mean that you should feel free to use the privilege whenever you wish. The high fees and interest rates that come with these financial tools mean that cash advances should always be approached with caution and never used for frivolous purchases. With these considerations and scenarios in mind, you’ll hopefully choose the wisest times to make use of this essential financial tool.

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Becky

Meet the award-nominated UK lifestyle blogger behind Spirited Puddle Jumper – a mum of three living in South East London! Becky shares the real ups and downs of family life, parenting tips, and lifestyle inspiration, proving that being a mum doesn’t mean you stop being fun or having other interests! Follow along for honest insights into UK family life and opinions on a whole range of topics, from travel and food, to beauty reviews, home and DIY, business and health and wellness.