What is a credit card cash advance fee? Charges, interest and risks explained

If you are a credit card user in India, withdrawing cash using a credit card, also known as cash advance can be a costly exercise. Given such a transaction provides immediate liquidity, still it comes with several serious consequences such as significant fees and interest charges that all current and aspirational credit card users must be aware of.

A credit card is nothing but a credit line provided to card holders by lending institutions to assist users in meeting their credit obligations. That is why such credit instruments must be used judiciously and responsibly by users primarily to keep their credit health secure.

What is a cash advance fee?

A cash advance fee is charged when you withdraw cash through an Automated Teller machine (ATM) using your credit card. This particular fee is generally a percentage of the amount withdrawn or a pre-decided flat fee, whichever is more.

For example, HDFC Bank levies a cash advance fee of 2.5% of the total withdrawal amount of ₹500, whichever is higher. On similar lines Kotak Bank charges ₹300 per ₹10,000 or part thereof, capped at a maximum of 2.5% of the advance amount or ₹500 whichever is higher.

Note: The fees discussed above are illustrative in nature only. They are subject to change at the discretion of the respective banks. It’s advisable to consult the official bank websites or contact customer service for the most current information.

Additional costs involved

Further, beyond the initial fee requirement, cash advances also attract immediate interest charges without any grace period at all. It is also important to note that interest rates are generally higher than those for regular credit card purchases.

The regulator has clearly mandated the banks to disclose the applicable charges for cash advances. This step has been taken by the Reserve Bank of India (RBI) to facilitate credit card users and bring transparency in the usage of credit.

Five key points to consider:

• Immediate interest accrual: Interest on cash advances starts accruing immediately and continues to mount rapidly if not taken care of, unlike regular credit card purchases that may even come with an interest-free period.
• No reward points: Cash withdrawals through credit cards, generally never help cardholders earn reward points. This simply reduces the overall value proposition of the entire transaction.
• Impact on credit score: When cash is withdrawn frequently through credit cards, it can signal weak financial management to lenders and hurt your credit score. It has the potential of negatively affecting your creditworthiness.
• Alternative options: You can also consider other avenues for availing funds such as personal loans, overdraft facility from a bank that might help you in securing loans at lower interest rates and better terms.
• High transaction fees: Cash advances mostly carry steep processing fees and charges. This can significantly impact and increase your total cost of borrowing.

Regulatory oversight

The regulator i.e., RBI has clearly instructed banks and financial institutions to mention and elaborate upon all charges related to credit card transactions, including the charges applicable on cash advances. The aim of such directions by the regulator is to bring more transparency and accountability in the financial system.

That is why credit card users are advised to check, understand and review the terms and conditions provided by their respective banks or Non-Banking Financial Companies (NBFCs) so that they are able to clearly understand the specific applicable charges for each transaction thus fostering information based financial decision making.

Hence, it is a given that cash advances help in securing quick access to funds, still the associated fees and interest charges can accumulate rapidly. Such mounting of interest over interest can also result in causing financial difficulties to cardholders later on and make things much more complicated for them if not resolved amicably.

That is why all cardholders should exercise caution before opting for a credit card cash withdrawal and look for other relatively less risky means to avail funds instantly.

Disclaimer: Mint has a tie-up with fintechs 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 scores. 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.