Nov 75 min read

What is a Cash Advance on a Credit Card? A Complete Guide.

Updated: Nov 26

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If you're facing an emergency and need quick cash, consider using your credit card for a cash advance. But what is a cash advance on a credit card exactly, and is it a smart financial choice? A cash advance allows you to withdraw cash using your credit card, but it comes with certain costs and risks. The growing number of credit card users in India has made it essential to understand how cash advances work, especially given their often hidden fees and high interest rates.

In this comprehensive guide, we'll explain a cash advance on a credit card, how it works, its pros and cons, and provide alternatives to this short-term financial solution.

How Does a Cash Advance on a Credit Card Work?

A cash advance on a credit card allows you to withdraw physical cash or transfer funds from your credit card to your bank account. Unlike regular purchases made with your credit card, financial institutions treat cash advances differently.

How to Access a Cash Advance

To access a cash advance, you can typically use one of the following methods:

ATM Withdrawal: You can use your https://www.onecreditscore.in/blog/categories/credit-cardat an ATM to withdraw cash, just like a debit card.
Bank Counter: You can visit a bank branch and request a cash withdrawal directly from your credit card account.
Cash Advance Cheques: Some credit card issuers provide checks that you can use to access cash directly from your credit card balance.

In India, most major banks and credit card companies, such as HDFC, SBI, and ICICI, offer this service, though the process may vary slightly between providers.

How Much Cash Can You Access?

A percentage of your total credit limit typically limits the amount you can withdraw as a cash advance. This limit can vary based on the credit card issuer’s terms but is often around 20% to 40% of your available credit. For example, if you have a credit card limit of₹100,000, you may be able to access₹20,000 to₹40,000 as a cash advance.

Key Features of a Cash Advance on a Credit Card

Understanding the main characteristics of a cash advance on a credit card is crucial before deciding whether it's the right option for your financial needs.

3.1. Fees and Interest Rates

A cash advance's most significant drawbacks are the associated fees and high interest rates. In India, credit card cash advances typically include the following fees:

Cash Advance Fee: This is typically a flat fee or a percentage of the total amount withdrawn (often around 2.5% to 3% of the transaction amount). For example, if you withdraw₹10,000, the fee might be₹250 to₹300.
Higher Interest Rates: Interest on cash advances is usually higher than on regular purchases. While typical credit card purchases might have an interest rate of 15-18% per annum, cash advances can carry rates of 24-36% per annum. Additionally, interest on cash advances starts accruing immediately after the withdrawal, unlike regular purchases where a grace period may apply.

3.2. Credit Limit and Available Cash

Your cash advance limit is usually lower than your total credit limit, and it's important to note that cash advances also reduce your overall available credit. If you withdraw a large amount, your ability to make regular purchases may be significantly limited until you repay the cash advance.

Advantages and Disadvantages of Using a Cash Advance

While a cash advance on a credit card might seem like a quick fix for financial emergencies, it's important to weigh the pros and cons before deciding.

Advantages of Cash Advances

Immediate Access to Funds: The biggest advantage of a cash advance is the ability to access cash quickly, especially in emergencies. Whether it's for medical expenses or urgent travel, having funds immediately available can be a lifesaver.
No Need for Collateral: Unlike personal loans or gold loans in India, a cash advance does not require any collateral. You can access cash based purely on your available credit.
Convenient: With credit cards issued by banks like HDFC, ICICI, and Axis Bank, the process is simple and can be done at ATMs or bank branches, making it a convenient option for many cardholders.

Disadvantages of Cash Advances

High Interest Rates: As mentioned, cash advances carry significantly higher interest rates than standard credit card purchases. Repaying the balance quickly can make it expensive.
Additional Fees: Cash advances come with both withdrawal fees and immediate interest charges, making them an expensive option for borrowing money.
No Grace Period: Unlike regular credit card purchases, which typically have a grace period before interest begins to accrue, interest on cash advances starts immediately.
Impact on Credit Utilization: Taking a cash advance can significantly increase your credit utilization rate, which could negatively affect your credit score.

How to Avoid the Pitfalls of Cash Advances on Credit Cards

If you find yourself needing a cash advance, there are ways to minimize the associated costs and avoid falling into debt.

Pay Back Quickly

The most effective way to reduce the financial impact of a cash advance is to pay it back as quickly as possible. The longer you carry the balance, the more interest you'll pay.

Avoid Frequent Use

Using cash advances regularly can lead to financial strain due to the high interest rates. It's better to treat cash advances as a last resort rather than a go-to option.

Look for Low-Interest Credit Cards

Some credit cards offer lower interest rates on cash advances than others. Research your options and choose a card that provides a better deal for cash withdrawals.

Alternatives to Cash Advances on a Credit Card

Before opting for a cash advance on a credit card, consider these alternative methods for accessing funds:

Personal Loans: Personal loans often come with lower interest rates than cash advances and may offer more favorable repayment terms.
Overdraft Facility: Some banks offer overdraft protection on savings or current accounts, allowing you to access funds at a lower interest rate than a cash advance.
Peer-to-peer lending: Platforms like Faircent and Lendbox in India allow individuals to borrow directly from others, often at competitive rates.

Conclusion

In conclusion, a cash advance on a credit card can provide immediate access to funds in times of need, but it comes with significant costs in terms of fees and high interest rates. It’s essential to understand how cash advances work, including their limitations and potential risks, before deciding to use this option. Although cash advances offer convenience, it's crucial to use them sparingly and repay them promptly to prevent debt accumulation.

Remember, there are also other financial products, like personal loans and overdraft facilities, which might offer better terms for those in need of urgent cash. Be sure to explore all options and choose the one that best suits your needs.

If you're interested in learning more about managing credit card debt or understanding your financial options better, check out resources from RBI or Niti Aayog.