How Do Cash Advances Work?
Smart Money

How Do Cash Advances Work?

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Ever used your credit card to withdraw money at an ATM? Or, perhaps to pay for a lottery ticket or gift card? Maybe you’ve used your card on a night out at the casino? Or to buy foreign currency before going on holiday?

Each of these examples is a cash advance transaction – in that you are using your credit card to get an advance of cash. But, while cash advances can be convenient, they are an expensive way to use your credit card.

So, what do you need to know about cash advances? While cash advances are generally best avoided, it can be helpful to understand how they work, so that if you ever do need to use one, you can make it work for you.

What is a cash advance?

When you use your credit card to withdraw cash – or to pay for something your card provider considers a ‘cash equivalent’ – that is a cash advance. Some examples of cash advances include:

  • Withdrawals made at the ATM, checkout or branch
  • Gift card, prepaid debit and credit card purchases and top-ups
  • Foreign currency and travellers cheque purchases
  • Gambling transactions within casinos and online
  • Lottery and scratch card purchases
  • Transfers to other accounts
  • Utility payments and government charges
  • Balance transfers (where there is not a promotional balance transfer rate)

It’s worth bearing in mind that some transactions may be processed as cash advances, even if they are not cash advance transactions. For example, using your credit card to buy food or beverages within a casino may result in the transaction being processed as a cash advance.

How much does a cash advance cost?

Before using your card’s cash advance feature, it’s a good idea to find out how much it will cost.

Cash Advance Fees: Your card provider may charge a fee on each cash advance, either at a flat rate of $2 or $3, or at a percentage of the amount transacted, say 2% or 3%.

Interest: When your card provider processes your cash advance, it will apply its cash advance rate to the transaction. This cash advance rate will likely be higher than the purchase rate, so interest will stack up faster. Not only that, interest on cash advances starts accruing from the day they’re made, unlike purchases, which may have a number of days ‘interest free’.

Other Fees & Charges: Depending on the type of transaction and where you make it, your cash advance could attract other fees and charges on top of those already mentioned. For example, you may have to pay ATM fees if you use your credit card to withdraw cash outside your provider’s network, or you may pay foreign currency conversion fees if you use your card overseas.

When should you use a cash advance?

There’s no denying using your credit card to make a cash advance can be incredibly convenient – but that doesn’t mean it’s a good idea. If you absolutely must use your card for a cash advance, make sure you understand how it works, and pay it back quickly before you get hit hard with interest.

When should you avoid cash advances?

For the most part, it’s best to avoid cash advances whenever possible. Using a debit card can help you avoid both fees and interest when shopping or withdrawing cash. Or, if you don’t have cash on you and you need to transfer money to someone, you could use an instant online transfer service that takes money from your bank account rather than your credit card.

If you’re stuck for money and need cash in a hurry, a short-term loan or personal loan could provide an alternative. Just be sure to read the small print and find out how much it will cost in fees and interest before you apply.

Cash Advance Pros & Cons

It’s quick and convenient
It can be handy when there is no other option

With added fees and a higher rate of interest, it can be costly
There are no interest free days on cash advances
Cash advance transactions don’t earn points

Founder - Roland B Bleyer

Roland Bleyer

Founder of Roland has extensive knowledge about credit cards in New Zealand. Known as a credit card expert, he has been featured on tv and in various publications.
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