Credit card cash advances: Use only in case of emergency

By Marianne Curphey

Published: 18 July 2012

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If you need cash, and your bank account is dried up, it can be tempting to withdraw some using your credit card -- also known as taking a cash advance. But be warned: Experts say this is one of the worst ways to borrow money.

"Taking money out on a credit card is a very expensive way to borrow," says Sarah Brooks, director of financial services at Consumer Focus. "We would recommend that before people do so, they take a look at other alternatives they may have."

The costs of cash advances
Cash withdrawals are costly. If you use your credit card in a cash machine to withdraw money, most card issuers will charge you a handling fee of around 2%. And, unlike with regular purchases, cash advances don't have an interest-free grace period. In other words, you'll start paying interest the moment you withdraw the money.

If you end up carrying a balance for several months, you'll pay even more. Credit card companies typically charge higher interest rates for cash advances than they do for ordinary purchases, says Michelle Whiteman, spokeswoman for the UK Cards Association, trade association for the UK card payments industry.

If you must get a cash advance, be sure you know exactly what it will cost you.

"It is best to check the terms and conditions of your credit cards in advance so that you know what you will be paying for, and what the charges are going to be," Whiteman says. "When you are looking at a credit card, or if you already have one, you can see in the Summary Box all the charges that go with the card and it is important to know what these are."

Cash advance complications
You might be taking a cash advance and not be aware of it. As they're defined by card issuers, cash advances don't always involve using your card at an ATM -- buying foreign currency and travellers' cheques, buying a postal order, using a card on gambling websites, and making some forms of electronic cash transfers and direct debit payments may all be considered cash advances in your issuer's eyes.

So be sure to check what your card issuer defines as "cash" and be particularly wary of using your card for anything that is equivalent to a cash withdrawal.

Another snag -- if you need a large amount of cash, you probably won't be able to borrow your full credit limit. The amount you can withdraw in cash is generally capped at a proportion of your credit limit, according to the UK Cards Association.

Cash advance cautions
"You should be only using cash withdrawals in emergencies or if you are in a situation where you unexpectedly need cash - for example if you are in a restaurant and they don't take cards and you need to be able to pay," says Una Farrell, spokeswoman for the Consumer Credit Counselling Service.

If you have the time to think about making a cash advance, however, then you  have time to find better options.

"There are other, better ways of withdrawing cash - for example using an overdraft or extending your overdraft," Farrell says.

If you are in an emergency situation that requires cash, you will need to make sure you deal with the financial fall-out of the cash advance quickly.

"If people do decide to take money out on a credit card they should try to pay this back as quickly as they can," Brooks says.

That, according to Farrell, means paying the balance off in full by the end of the month to avoid a second (or third) month of higher interest rates.

If you find yourself "needing" cash advances on a regular basis, it's probably a sign that you are struggling to manage your finances effectively -- and that things are about to get much worse. If your bank account is constantly empty (requiring the need for a cash advance), you probably won't be able to pay off the balance by the end of the month, which will harm your credit. That will make it more difficult to get regular loans at low interest rates -- keeping you dependent on expensive options like cash advances.

If you find yourself in such a cycle, it is best to seek the help of a free debt counselling service such as Citizens Advice, National Debtline or CCCS. These services can help you deal with your existing debts -- and prevent you from taking out a cash advance in desperation.

See related: Are payday loans replacing credit cards?, Credit counsellors share consumers' biggest credit mistakes