AUDREY Lim (not her real name) discovered she was low on cash. In order to purchase groceries she resorted to withdrawing cash using her credit card at an automated teller machine (ATM).
"I withdrew RM250, but was shocked when I received the credit card bill. I was charged a cash advance fee of RM50 for making that transaction. That is 25 per cent of the cash amount.”
"I should have heeded advice from friends. They told me taking cash advances using a credit card is not advisable, as the interest and cash advance fee are hefty," Lim told this writer here recently.
"It is worse than borrowing from a pawn shop," she lamented.
Financial consultant, Ng Lai Wai said taking a cash advance using the credit card is risky, expensive, and carries the potential of incurring debt if the customer does not quickly repay the advance.
"Cash advances often come with fees, from one to four per cent of the advance. Cash advances also have higher interest rates compared to regular purchases," explained Ng.
Ng also said some banks charge up to RM50 for a cash advance transaction.
"Most credit cards do not provide a grace period for cash advances, meaning that interest starts accruing as soon as you take the cash from the ATM. And there are other charges, like ATM fees," he said.
Ng said these charges can make cash advances extremely expensive.
Ng advised credit card users to take a cash advance only for 'true emergencies', such as unexpected medical expenses.
"Avoid taking out a cash advance to pay for ordinary everyday items like groceries. Credit card holders should also know their cash advance limit.
"The cash advance limit is less than the credit limit. Exceeding the cash advance limit will result in higher charges and interest rates.
"If an emergency happens, take out only what you need and nothing more. Avoid the temptation to withdraw just a little more for you to have some extra money. That will only make it harder to repay the advance."
Ng said the need for quick cash is often symptomatic of a larger money management problem, such as overspending or the absence of an emergency fund.
"In cases like these, repaying a cash advance could take a long time and cost a lot of money," he explained.
Further, he advised consumers to consider alternatives before taking a cash advance using a credit card.
"Maybe you can ask for a small loan from a family member or friend. The other alternative is asking for an advance from your employer," he said.
He noted that most credit cards give the holder the option of withdrawing a cash advance from the person's line of credit on his credit card.
"You only need to go to any ATM and use your credit card to withdraw cash. This appears like an attractive option. In theory, it seems like it should be the same as using your credit card to purchase goods for an equivalent amount.
"Unfortunately, people who use their cards to get cash advances, while under this impression, are in for a big shock when the credit card bill arrives," said Ng.
Ng said using the credit card to obtain a cash advance is generally a bad idea.
"It appears the same as using your credit card to make purchases, but what consumers frequently fail to realise is that the rules for using the credit card to make purchases and the rules regarding cash advances are completely different and not in their favour.
"The interest rates for a cash advance are different from the interest rates on the balance of your credit card.
"The interest rate on your cash advance will be much higher than the interest rate on your card. Usually the interest rate on any cash advance will be between 20 and 25 per cent.
"In addition, most credit cards charge a flat fee for any cash advances you take out, regardless of the amount that you take, every time you take them.
"This means that whether you are withdrawing RM50 or RM500, the credit card company will be charging you the same amount just for using the facility. The bank that owns the ATM that you use to take out the cash advance will also charge a fee," Ng said.
The financial consultant said when a consumer takes out a cash advance, the interest starts the minute the money comes from the ATM.
"Many credit card companies will require you to pay off any non-cash balance that you might be carrying on your card before they will allow you to apply your payments to the cash advance.
"This means that they force you to pay down the amount with the lower interest rate, while the cash advance balance stays untouched, with the amount owed continues to increase under a high interest rate," Ng explained.
He added that any benefits of using a cash advance on the credit card are far outweighed by what it might cost the holder.
Source: Bernama, 4 April 2012