Credit Cards With A Low Cash Advance Rate
As you use your credit card, you may notice that some of your transactions attract one interest rate, while other transactions attract another interest rate. Why is this? For the most part, credit cards charge different rates of interest on purchases and cash advances, with the purchase rate typically lower than the cash advance rate.
So, why are there different rates for different types of transactions? Risk is a big word in the world of credit cards. Ever wondered why the interest rate applied to home loans is usually around 4% p.a., while the interest rate on credit cards can reach 22% p.a. and higher? That’s because credit cards are deemed a much riskier form of credit.
When you apply for a home loan, there's a very involved process for applying. You need to prove your income, your assets, and various other factors. This – and the fact that the loan is secured against your property – makes it lower risk. On the other hand, while credit cards still have an in-depth approval process, card providers are essentially lending out thousands of dollars, with no form of collateral.
For that reason – and because card providers have to cover the costs of offering credit card extras – the interest rates applied to credit cards tend to be higher. Well then, why are cash advance rates typically higher than purchase rates? Again, we go back to the idea of risk. Purchases are deemed lower risk, while cash advances are higher risk.
Just think, if you’re willing to use your credit card to withdraw money, that would usually point to the fact that you have no other option. How does your card provider know you will be able to pay it back? That makes it a high risk transaction. In the same vein, gambling in all forms is risky, especially for addicts who don’t know when to stop.
Of course, that’s not to say you can’t find some cards with a lower cash advance rate, despite the risk. As low cost cards, these options tend to be fairly basic in their offering, which means they are unlikely to offer dazzling features or rewards. But, for cardholders who plan on using their card for cash advance transactions, they can help to keep interest costs down.
How Cash Advances Work
What is considered a cash advance tends to vary according to the card provider, which is why it’s a good idea to check the small print before using your card. With that in mind though, here are some of the transactions most commonly deemed ‘cash advances’:
• Cash withdrawals from an ATM, bank branch or at the checkout
• Foreign currency or traveller's cheques purchases
• Purchases of gift cards, prepaid debit cards and top-ups
• Using a non-BPAY registered billing service to pay bills
• Transactions at physical or online casinos (these can include money spent on food and beverages)
• Other gambling transactions, such as buying lottery tickets or scratch cards
• Utility and government charges
• Funds transferred from your credit card account to any other bank account
How Much Cash Advances Cost
One of the main reasons to avoid cash advances is their cost. Let’s break those costs down.
Interest: Unlike purchases, which may have a number of days before interest is applied, you will be charged interest on your cash advance transaction from the day it’s made. On a low cash advance credit card, that interest cost will obviously be lower, but if your card has a much higher cash advance rate, those interest costs will quickly add up, making it harder to pay off what you owe.
Cash Advance Fees: Even on low cash advance cards, you will usually pay a cash advance fee on every cash advance transaction. This fee may be a flat amount, say $3 or $4, or it could be a percentage of the transaction amount, for example 2% or 3%. As an example, if you used your credit card to withdraw $1,000 with a 3% cash advance fee, you would pay a $30 fee, which would be added to your balance, and in turn, would increase your interest charges.
ATM Fees: Depending on the ATM you use, you may be charged an ATM fee when you withdraw money using your credit card. This will often be the case if you use an ATM outside your provider’s network, or if you use your card to withdraw money overseas.
Overseas Fees & Charges: Using your credit card for cash advance transactions overseas will typically result in even more charges. Using an ATM will usually result in ATM fee, while any transaction made in a foreign currency will likely attract a foreign currency conversion fee. Again, these charges will be added to your balance, leading to even higher interest charges.
Alternatives To Cash Advances
As you can see, even paying a lower rate of interest on a low cash advance card can result in higher costs than you might have expected. So, what are the alternatives to cash advances?
Using your debit card: If you have funds available – and you simply didn’t realise using your card for cash advance transactions resulted in higher costs – using your debit card provides an easy alternative. Using your own money, you avoid paying interest of any kind, and you can avoid most fees as well.
Using a bank transfer: If you need to pay someone but don’t have cash on you, there are plenty of ways to initiate an instant transfer online. Osko payments from one bank account to another are made in real time, while PayPal and other providers offer a similar service (although fees and registration may apply).
Applying for a loan: If you are short on funds, you could consider applying for a short-term loan or personal loan. Before you decide whether this is the right option for you, be sure to compare options and take into account fees and interest costs. Some providers offer same day access to funds if you need money in a hurry.
Low Cash Advance Cards - Frequently Asked Questions
A low cash advance card – also known as a low cash advance rate card – is a credit card with a low cash advance rate. This rate will usually range between 9% and 16% p.a., depending on the card provider.
The main reason to choose a low cash advance credit card is to save on interest when using the card for cash advance transactions. Whether that means using the card to withdraw money at the ATM, using the card to buy foreign currency, or using the card for gambling transactions, such as buying lottery tickets or gambling online.
With a low cash advance card, you will pay less in interest on these types of transactions, helping you to keep your balance as low as possible. In turn, this should allow you to pay off your balance faster.
It’s generally not recommended to use a credit card for cash advances. If there are other ways for you to cover cash advance transactions, it’s usually a good idea to make use of them. However, if there are no other alternatives available to you, a cash advance can be helpful in a fix. Just be sure you can pay back what you borrow, while keeping interest costs to a minimum.
A card’s cash advance rate is usually quite an unimportant feature. Unless you plan on using cash advances regularly, it’s unlikely you’d pay much attention to a card’s cash advance rate over other features that are perhaps more important. With that in mind, let’s take a look at other factors to consider when comparing low cash advance credit cards – once you’ve looked at its cash advance rate, of course.
Cash Advance Fee: If you plan on using cash advances on a regular basis, you should check what your card provider charges as a cash advance fee. While these fees may look small, they will add up over time.
Purchase Rate: As you will likely be using the card to make purchases more than cash advances, you will need to take into account its purchase rate. Also check whether the card offers any interest free days on purchases (these are usually only offered when you clear your balance each month by the due date).
Annual Fee: A card’s annual fee can tell you a lot about a card, least of all whether you can afford it. Cards with higher annual fees tend to offer more features, which may include rewards. You will usually find that cards with higher annual fees also have higher interest rates, which may not work for you if you’re looking to keep interest costs down.
Other Fees: Think about how you will use the card, and then factor in how each card’s fees may affect you. If you travel overseas or shop online at international retailers, pay close attention to the card’s foreign currency conversion fee, for example. Or, if you plan to use the card to withdraw money at ATMs, find out how much this will cost in ATM fees.
Features & Rewards: If keeping costs down is paramount, a basic card with a low rate on purchases and cash advances would likely be your best bet. These cards typically don’t offer much in the way of features and rewards, but it can be nice to compare what’s on offer in order to find some that may suit.
If you’ve run up a balance on your current card – made up of purchases, cash advances or both – you can choose to transfer that balance using a balance transfer offer to take advantage of a lower rate. Obviously, you would need to meet the card's eligibility requirements and be approved by the issuer.