With a credit card, the idea of taking a cash withdrawal or cash advance may seem suitable when facing financial challenges. However, grasping what it means when you do this is important, especially if you are concerned about your credit score and overall financial health.
What is a cash withdrawal from a credit card?
Cash advances let you withdraw cash from your credit card, up to a pre-set limit. Cash advances are typically more expensive, with higher rates and fees than general purchases. They also typically start accruing interest immediately, while purchases may not accrue interest for a grace period.
Impact on credit score
- Higher interest: Interest is incurred immediately for cash advances and they usually bear a higher interest rate in comparison to a credit card purchase.
- Missed payment: If you are late on payment, or you do not pay at all, your credit score will be negatively impacted, and significantly so, because late and non-payment delays are reported to credit bureaus.
- Elevated credit utilisation ratio: If you use a substantial amount of your credit limit, lenders may feel that you are dependent on credit, which will decrease your credit score. Cash advances simply may inflate your credit utilisation ratio for the simple fact that you are taking on more debt.
Impact on lender perceptions
Regular cash advances may be interpreted by certain lenders as an indication of poor money management. This, in turn, may influence the lenders to either provide less credit to the borrower, increase the interest rate charged, or refuse to provide any credit at all.
Alternatives of credit card cash withdrawal
- Personal loans: Compared to cash advances on credit cards, personal loans typically have lower interest charges and may offer flexible repayment schedules.
- Overdraft protection: Establishing overdraft protection on your bank account can help provide an additional cushion so you can pay unplanned costs without incurring high cash advance charges.
- Emergency savings: Building an emergency savings will reduce your reliance on credit for money needs, acting as a buffer against unexpected expenses.
In conclusion, while cash advances on credit cards may provide immediate access to money, they can have significant financial consequences with things such as high fees and increased debt, and may even affect your credit score. Knowing the consequences of this option and evaluating alternatives will help you better manage your credit and financial health.
Disclaimer: Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.