When you’re facing a cash crunch, you may be tempted to withdraw cash using your credit card. Getting a cash advance on your card is easy. All you have to do is use your credit card at the nearest ATM and withdraw the required amount. It is super convenient, and you can get cash instantly. 

However, before you choose this option, make sure to understand the impact of a cash advance on your credit score and finances. This article explores the effects of your credit score on a cash advance and vice versa. 

What is a cash advance? How does it work? 

A cash advance refers to withdrawing cash using your credit card at an ATM. The maximum amount that you can withdraw depends on the card type and limit. When you get a cash advance on your credit card, the amount you withdraw, plus the extra cash advance fees and ATM fees (if any), are added to your credit card balance. It is also noted in your credit card statement, just like other regular card purchases. 

Here are two key points to know about cash advances:

  • First, cash advances have a higher APR (interest rate) compared to regular card transactions. 
  • Second, there is no way you can avoid paying interest on a cash advance. Unlike regular card transactions with a 30-day grace, the interest on a cash withdrawal starts incurring as soon as the amount is added to your balance. 

Simply put, cash advances are more expensive than using your credit card for regular purchases. So, they have to be used with caution. 

Do I need to have a high credit score for a cash advance? 

No, your credit score won’t be checked when you withdraw cash using your credit card. The cash withdrawal amount is fixed at the time of the card issue, and your credit score/history does not affect it. 

You can withdraw cash as and when required depending on the cash limit that comes with your card. This limit is specified during the card issue. You can find it on the brochure that is distributed along with your credit card. Alternatively, you can also check the limit on the card issuer’s website or by calling the customer care team. 

Will a cash advance affect my credit score? 

A cash advance doesn’t directly impact your credit score. However, it affects various other factors that make up your credit score, causing your score to take a hit. Let's take a closer look at the relationship between a cash advance and your credit scores. 

  • The cash advance is not noted in your credit report. But the amount you have withdrawn is indicated in your credit card bill. This increases your credit card balance, which can hurt your credit score. Generally, the credit card balance accounts for 30% of your credit score. Taking a cash advance on your card increases the credit utilisation rate, which damages your credit score. 
  • As mentioned above, cash advances are expensive and increase your overall debts. This makes it challenging to repay other debts. Failing to repay debts on time is noted in your credit report, and it can hurt your credit score in the long run. 

As you can see, though a cash advance doesn’t directly impact your credit score, it can damage other factors causing your credit score to take a hit. 

Other Alternatives to Cash Advances

As you can see, a cash advance is expensive and can affect your credit score indirectly. So, if you’re in a cash crunch, here are other alternatives to raise money quickly without taking a cash advance:

  • Use your debit card – You can use a debit/ATM card to withdraw money from your savings account. Since you’re withdrawing money from your account, there are no interests or withdrawal fees levied. Depending on the amount withdrawn and the ATM used, you may have to pay a nominal ATM usage fee (around Rs. 10 to Rs. 20). 
  • Go for an online personal loan – The interest charged on personal loans is lower than what is charged by your credit card. Additionally, taking a personal loan and repaying the EMIs on time is noted in your credit report and will help you build your credit score. 
  • Take a payday loan – Payday loans are instant loans that are offered to salaried individuals. Payday loans are instantly available, and you can receive the loan amount within a few hours, provided you meet all the eligibility criteria. However, make sure to compare interest rates and repay the loan on time to avoid falling into a debt trap. 
  • Use your emergency fund – This isn’t a way to raise cash quickly, but it’s the best method to rely on when you require immediate cash. Start by building an emergency cash fund with at least 3 to 6 months of your salary. Use this amount for future emergencies. Having an emergency fund acts as a financial cushion that you can rely on whenever you need funds in the future. Make sure to rebuild the fund once you use it. 

Be Cautious While Using Cash Advances

A cash advance doesn’t hurt your credit score directly, but it has the potential to bring down your score.

But it can increase your overall debts and credit utilisation rate, all of which have the potential to damage your credit score. So, make sure to analyse the pros and cons, check if there are any other alternatives before going for a cash advance to meet emergency needs. 

FAQs

  1. Is it bad to take a cash advance on a credit card? 

A cash advance is expensive and costs more than regular credit card transactions. So, it’s a good financial habit to avoid using them unless needed. And, if you use your credit card to make a cash withdrawal, make sure to repay it as quickly as possible to avoid the interest from piling up. 

  1. What are the charges incurred when I withdraw cash from my credit card? 

Here are the charges that you incur when you withdraw cash using your credit card:

  • Cash advance fee ranges from 2% to 3% of the withdrawn amount, and generally, the minimum amount is set to Rs. 250 to Rs. 500. This fee is added to your next credit card bill. 
  • Interest charges – Just like regular card transactions, cash withdrawals attract finance charges. The interest is calculated from the date of withdrawal till the day you settle the bill in full. 
  • Late payment penalties – Late payment charges are added to the outstanding balance if you do not pay the bill amount in full. It ranges from 15% to 30% of the balance amount. 
  1. How much cash advance can I get from my credit card? 

This amount varies from card to card and is based on your credit limit. You can find the maximum amount available on your card in the brochure, website, or by calling your credit card customer care. 

  1. Is there any way to withdraw cash from my credit card without using the cash advance feature? 

No. Anytime you use the card at an ATM, it is noted as a cash advance. Alternatively, you can transfer money from your credit card to a mobile wallet, and from the mobile wallet to your bank account. Then, use your debit card to withdraw cash from an ATM. However, note that not all credit cards support transferring money to a mobile wallet. 

  1. I forgot my credit card PIN. How can I withdraw cash using it? 

You have two options:

  1. Reset the credit card PIN. You can do this either online or by calling the customer care of your credit card. 
  2. Alternatively, visit your bank and let the executive know that you’ve forgotten the PIN. The executive will help you reset the PIN at the branch.