Taking a cash advance on a credit card is normally considered the option of last resort for obtaining cash while traveling. In this post I’ll discuss how to use cash advances wisely.
The reason cash advances normally get a bad rap is because most banks charge a fairly hefty cash advance fee, usually 2-5% of the advance amount. In addition, they charge daily interest on the advance, usually at an interest rate higher than your normal credit card rate, until you repay the advance. Why would anyone want to do this?
Normally cash advances are a used in order to get cash if you don’t have funds in your checking account. A cash advance is a short-term loan from your credit card bank at a high interest rate. If you find yourself in this situation, hopefully it’s a temporary one, such as waiting for funds to transfer to your checking account.
But it’s possible to use cash advances for getting cash out even when you have access to funds using your debit cards. Some financial institutions offer credit cards with no fees for cash advances, including international advances. You still have to pay the daily interest fee on your advance, but if you immediately cover the cash advance with a payment to your credit card from an online bank account, you can get away with very low transaction charges, sometimes even less than the charges for a good debit card.
How to use cash advances with minimum charges
First you have to obtain a credit card from a financial institution that offers no-fee cash advances. Google “credit cards with no cash advance fees” and you will find some of these cards offered by banks or, more commonly, credit unions. Then you need to find an ATM which accepts your credit card. We have a no-fee cash advance MasterCard from First Tech Credit Union which is accepted at most any ATM which will accept MasterCard debit cards. When the ATM asks whether you want to make a withdrawal from Checking, Savings, or Credit, you select Credit. Enter your amount and take your cash.
That same day, go back to your room or wifi hotspot and log on to your bank and make a credit card payment to cover the cash advance. You will get charged one day of interest…no way around that. How much interest? The yearly interest rate on our MasterCard is 12.24% and cash advances are charged at the credit card rate plus 1%, so the adjusted yearly interest rate is 13.24%. Divide that by 365 days to get your daily interest rate. In our case this is .036% per day. If you always cover your cash advances with an immediate (same day) payment to cover the advance, you end up paying .036% in fees (not including any foreign ATM charges). By comparison, using our First Tech debit card, we would be paying 1% fees (again, not including any foreign ATM charges). In other words, the cash advance fees are less than the debit card fees. Of course, you have the additional hassle of having to go online to repay every advance promptly or pay higher interest fees, so you may still decide the debit card is worth the extra fees.
Cash Advances Usually Get Paid First
What if you have other charges on your credit card? How do you make sure your payment gets credited towards the cash advance amount? Our First Tech representative told us that payments are always applied to the highest interest charges on our card first. Since the cash advances have a 1% higher interest rate than our credit card purchases, any payments we apply to our credit card cover the cash advances first. Check with your bank to make sure this is true for your cards as well…most likely it will.
If you can’t find an ATM to use for the advance, you can usually get the advance directly at a bank.
Do we recommend this method of obtaining cash? No, not particularly. You can get yourself a Capital One 360 checking account which charges no international fees at all on debit card ATM withdrawals, and that’s an even better option. We mention this method in case for some reason you’d rather not carry a debit card, or you lose your debit card, or you don’t want to set up the Capital One 360 account, or whatever. If you have the right credit card up front and find yourself in the situation where you need a cash advance, this is a way to minimize the charges.