How Do Low Cash Advance Rate Credit Cards Work?

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Credit card companies love to prey on the unsuspecting credit card user. One of the many tricks employed by card companies to lure a little extra money out of us is the 'cash advance'.

Cash advances, or cash transactions, are one of the many usages that can see us, at the end of the month, staring blankly at our credit card statement wondering what all these extra charges and fees are.

What constitutes a 'cash advance'?

A cash advance is made when you use a credit card to access cash.

However, cash advances cover more than just withdrawing physical ten-pound notes from an ATM machine.

They also include getting 'cash back' at your local supermarket - or any other shop that offers a 'cash back' service, buying foreign currency or traveller's cheques and the more recent addition of gambling transactions - sometimes even including buying food or drink at a gambling establishment.

Why are cash advances different from purchases?

Cash advances differ from purchases because credit card companies count these transactions as separate items on your credit card account, and as such, charge different interest rates and fees on these items.

While the quoted 'APR' of a credit card is a legal representation of the cost of credit - borrowing money, the APR only consists of the purchase interest rate and any annual fee if charged.

The interest rate and fees for using a credit card for a cash advance, or other cash transaction, is therefore quite hidden and can only be known from reading through the terms and conditions of your credit card account.

How much am I charged for cash advances?

Credit card companies charge an interest rate for outstanding cash advances, and also a handling fee for processing the transaction.

The actual interest rate and fee charged varies quite considerably between credit cards. However, some credit cards do charge rather astronomical interest rates for cash advances and do not include these transactions in their 'interest free period' - so you will be charged interest from the day of the transaction until repaid in full, even if you clear your statement balance in full.

Cash advance handling fees can also vary; the average fee is around 2% - 3% of the transaction amount, with a minimum charge of around £2 to £5.

What does a low cash advance rate credit card offer?

- Low cash advance rates and cheaper cash handling fees
A low cash advance rate credit card can offer a much cheaper interest rate on cash advance transactions - they also tend to offer cheaper cash handling fees too, and some low cash advance rate credit cards even waive the cash handling fee altogether.

- Interest free periods for cash advances
Low cash advance rate credit cards can also offer differing interest free periods and allocation of payment terms too.

When using a credit card for cash advances - the interest free period and / or allocation of payments can make a real difference in lessening the cost of these transactions.

If you tend to always clear your credit card balance in full each month, but also use your credit card for cash advances, choosing a low cash advance rate credit card that includes cash advance transactions in its interest free period is a silly choice not to make.

While most credit cards only include purchases, a card that offers cash advances in the interest free period means that if you do clear your card balance in full each month, you won't be charged any interest on your purchases or your cash advances.

- Allocation of payments
The allocation of payments is a terms and conditions clause that lists the order in which payments made to your account will be applied.

Because credit card companies separate different types of transaction into different balances on your account - they can then choose to apply your payments to cheaper balances before more expensive ones.

Low cash advance rate credit cards sometimes offer an allocation of payments clause that will list the repayment of cash advances first - before purchases and / or balance transfers.

Choosing a credit card that will apply your payments to cash advances first, can mean that if you only repay some of your outstanding balance you will be able to pay off the more expensive cash advance first - rather than have it lingering on your account while you try to repay any cheaper balances resulting from purchases and / or balance transfers.

Are low cash advance rate credit cards any good for purchases too?

Usually yes - because low cash advance rates tend to be found on credit cards advertised for their low interest rates.

However, this is a not a strict rule - and because most people will use a credit card more for purchases than for cash advances, it's important to choose a credit card that offers a good deal on purchases transactions as well as for cash advances.

What should I look for when choosing a low cash advance rate credit card?

When comparing low cash advance rare credit cards these are some of the main points you should consider:

1. If you repay your credit card balance in full each month, choose a credit card that includes cash advances in its interest free period – this will mean that you won’t be charged any interest for purchases - or cash advances - if you clear your statement balance in full and on time each month.
2. If you often leave a balance outstanding on your credit card, choose a credit card offering the lowest interest rates on cash advances, but also one that offers a low rate for purchases too.
3. How much interest is charged for cash advances? - Look for the lowest interest rate.
• Tip: The best credit cards for cash advances will charge the same or marginally higher interest rates as they charge for purchases.
• Tip: The interest rate quoted for cash advances (also called cash withdrawals) will be charged for purchasing foreign currency and traveller's cheques, as well as withdrawing cash from an ATM machine or getting 'cash back' at the supermarket.
• Remember: The typical APR is the interest rate (plus any annual fees) charged on purchases and does not take into account using the card for cash advances. The interest charged on cash advances can vary dramatically from that charged on purchases (or the typical APR), so it’s vital to find out how much interest is charged on cash transactions, including any applicable fees.
4. How much is the cash advance handling fee? - Look for no fees or the lowest handling fee.
• Tip: Most credit cards do charge a handling fee for cash advances, but they do vary with some cards charging more than others. There are also one or two credit cards that do not charge a fee at all.
5. Does the interest free period include cash advances? - Look for credit cards that include cash advances in their interest free period.
• Tip: The interest free period is the amount of time you have each month to repay your balance in full before you are charged any interest. However, most credit cards only include purchases in their interest free periods, so you will be charged interest on any cash advances from the date of the transaction until they have been repaid, regardless of whether you repay your entire monthly balance in full or not.
6. How are payments made to credit card allocated? - Look for credit cards that allocate payments to cash advances before purchases or lower rate balances.
• Tip: When you make a payment to your credit card it has an order of allocation to which balances will be repaid first. If the credit card allocates payments first to promotional or lower rate balances, you will have to repay these transactions in full before you can begin to repay any higher rate transactions, such as cash advances.
• Watch out: Credit cards that allocate payments first to promotional (0%) or lower rate balances require you to repay in full any 0% or lower rate transactions before you can even begin to repay any higher rate balances, such as cash advances. This is extremely important to remember if you are making use of a 0% balance transfer offer and using the same credit card for non-promotional purchases or cash advances. Our advice: use a different credit card for your cash advances than the card you are using for a 0% or low rate balance transfer. This is so that you will be able to repay any cash advances you have made, whilst still enjoying your 0% rate.

You can find out more in our credit cards and cash transactions article.

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