Credit card cash advances; Everything you need to know

The cons of credit card cash advances

1. Credit card cash advances have no grace period

When using a credit card for regular purchases, you can avoid interest charges if you pay off your balance in full by the date indicated on your monthly statement. Most cards offer a 21-day grace period from when you receive your monthly statement to when your balance is due, during which you can pay back what you owe without incurring any interest.

This is not the case with cash advances and you’ll start accruing interest charges immediately from the moment you pull out money from the ATM, with no grace period or interest-free window.

2. Credit card cash advances charge a higher interest rate

Not only do interest charges on cash advances kick in immediately with no grace period, but the interest rate on cash withdrawals also tend to be higher compared to other credit card transactions.

For most credit cards, you’ll pay an annual (purchase) interest rate of 19.99% on any balance you don’t pay off in full. In comparison, the annual interest rate on cash advances can climb to upwards of 22.9%, and in some cases, 24.99%. That three to five percentage point difference can add up, especially if you require a long time to pay back your cash advance. Not to mention, the interest rate you pay on your cash advance can increase if you regularly miss payments or have an account in bad standing (although you may be able to negotiate these terms with your card issuer’s customer service team).

3. You may have to pay additional upfront fees

Along with interest payments, credit card cash advances often include additional upfront fees. These cash advances fees are either charged as a flat-rate or are calculated as a percentage of the amount of money withdrawn (and are often accompanied with conditions that stipulate you can be charged a minimum or maximum amount).

For example, if a card issuer charges 1% of the withdrawn amount with a minimum fee of $3.50 and a maximum of $10 and you withdraw $500, you’d pay $5 just for the convenience of accessing the money.

You may also be hit with other minor withdrawal fees such as in the case you use an ATM that is not associated with your bank or card issuer or get a cash advance outside of the country. Fee amounts and structures do vary from one financial institution to the other, so make sure to read the terms and conditions of your card agreement or check with your card issuer’s customer service team.

4. You won’t earn rewards on a credit card cash advance

With some of the best credit cards in Canada, you can get upwards of 4% in cash back or travel points per dollar you spend on eligible everyday purchases such as gas or groceries. However, when it comes to cash advances, you’ll earn absolutely no rewards.

The terms and conditions for the majority of credit cards explicitly exclude cash advances as an eligible “purchase” – which means you won’t be able to offset even a small portion of the cost of interest by earning rewards when paying back your cash advance.

5. Cash advances can (indirectly) hurt your credit score

When using a credit card cash advance, you are borrowing money from the bank or your card issuer (on top of any money you already owe on your card for making regular purchases and any other loans you have).

The more ways you borrow money, the more vulnerable you could be to missing a payment and potentially hurting your credit score down the line. This may be particularly true for cash advances, which charge higher interest rate and therefore can make it more difficult to pay back what you owe on time.

Cash advances can also negatively impact your credit score by increasing how much money you’re borrowing relative to your overall credit limit, also known as your credit utilization rate. Generally speaking, you only want to borrow 30% of your overall limit to get a good credit score, which may be a harder target to hit if you suddenly withdraw a large credit card cash advance.

Depending on the specific credit card you carry, you may even be required to undergo a separate credit approval process just to be considered eligible for a cash advance. You’ll want to dig into the details of your cardholder agreement or speak with a customer rep from your bank to clarify your card’s policy beforehand.

6. Cash advances offer fewer protections

The majority of credit cards come with built-in protections like four-digit pins, tap limits, and zero liability that’ll cover you in the event your card is lost, stolen, or if fraudulent or unauthorized transactions were charged to your card. With a cash advance, you won’t have those same protections since you’ll be accessing your credit limit as cash.
 

Alternatives to credit card cash advances

There are a number of alternatives to credit card cash advances – each with their own pros and cons – that you may want to consider, including the following:

• Carry a balance: if you’re in a cash crunch and absolutely reliant on your credit card to temporarily tie you over, it’s almost always better to simply use your credit card to pay for purchases and carry a balance as opposed to taking out a cash advance. The most obvious reason why is the interest rate when carrying a balance is usually lower than the rate charged on cash advances – so it’ll cost you less to borrow money. If you happen to have a cash back or travel card, you could also earn rewards that’ll help offset at least some of the interest charges, which isn’t possible on a cash advance, though, ideally you’d use the credit card with the lowest rate possible.
• COVID-19 credit card relief measures: if you’re facing new hardships due to COVID-19 and are thinking of a cash advance as a last resort, consider holding off and reaching out to your card issuer first. In the wake of this pandemic, many banks are offering payment deferrals and a reduction in credit card interest rates for a limited period of time (between one to six months, though policies do vary by bank), as well as other potential relief options. These solutions can help you delay minimum payments and ensure you have more cash on hand to cover more immediate and necessary purchases in the short-term as opposed to paying down your debts.
• Personal loan: if you have a strong credit score and a good track record of paying back debts with your bank, you could secure a better rate and terms from your bank by asking for a personal loan.
• Chequing account overdraft: you could apply for an overdraft and use your debit card to withdraw more money than you have in your chequing account for a fee from your bank.
• A loan from friends and family: negotiating favourable terms can be considerably easier when borrowing money from people you know. However, there can be other consequences when mixing loved ones with your personal financial affairs.
• Group RRSP: if you’ve been investing your money in a workplace RRSP fund, you can withdraw a portion of the money you need early. There are major consequences here though, such as the fact you will be charged tax on your investments for pulling out money and it’ll impact your RRSP contribution limit.
• Home equity line of credit (Heloc): if you’re a homeowner, you can leverage your property as an asset and get access to new funds at a much lower rate through a HELOC. It’s worth noting that HELOCs are often reserved for large loans for significant costs rather than smaller emergencies that could be covered by a credit card cash advance.

You should avoid credit card cash advances, but…

As highlighted above, there are plenty of cons to using a credit card cash advance and they should be avoided as much as possible. That said, cash advances offer a fast and easy way to access paper money without additional paperwork, no (or few) additional qualification requirements, and without having to leverage any of your assets. In cases of extreme emergencies where you have no alternatives and have a plan to pay back what you withdrew, a cash advance may be an option.

If you’re going to get a credit card cash advance, it’s best not to use a typical rewards credit card but a low interest credit card with a low cash advance rate. While most rewards cards charge upwards of 24.99% on cash advances, some of the best low interest credit cards in Canada charge considerably more affordable rates.

With the BMO Preferred Rate Mastercard, you’ll pay a low interest rate of 12.99% on purchase, balance transfers and any balance you carry over, and 15.99% on cash advances. You’ll also get access to some additional perks including extended warranty and purchase protection as well as a lengthy nine-month promotional rate on balance transfers of 3.99%. One thing to note: there is an additional fee of $5 on cash advances.

Scotiabank Value Visa

The Scotiabank Value Visa offers a low flat interest rate of 12.99% across the board on purchases, balance transfers, and cash advances – though, the latter does include an additional $3.50 fee. The card also offers a teaser rate of 0.99% on cash advances for the first six monthly statements, which also applies to balance transfers (offer expires November 21, 2021). The card comes with some ancillary benefits such as discounts on rental cars at select AVIS locations, and while it does charge a $29 annual fee, you could walk away with more in savings every year when factoring for its lower interest rates.

There are a handful of other low interest cards like the National Bank Syncro Mastercard and Desjardins Classic Visa that do offer cash advances annual interest rates of 12.99% versus the status quo of 22.9%-24.99%.

Bottom line

No matter which avenue you choose, a credit card cash advance or a personal business loan, it will come at a cost. Therefore, it’s critical that you always budget your expenses and ensure you save money over time and build up a “rainy-day fund” in case you need to cover the cost of a sudden emergency.