Credit Card Cash Advance: What is it? How its misuse can lead you to significant losses?

Credit Card Cash Advance: In today's fast-paced world, credit cards have become an indispensable financial tool for people. The card offers features like instant payments, convenience in making purchases, loan facilities, and much more. However, many users are unaware that, like debit cards, credit cards also offer a cash withdrawal facility called cash advance. Doesn't this seem like a quick solution when you need money immediately? But one should use this option in exceptional circumstances. If one makes it a habit to use credit card cash and fails to pay the credit card bill, they will not only be paying interest on withdrawals but they will also be slapped with a monetary penalty.

What is a credit card cash advance facility?

A credit card cash advance allows cardholders to withdraw cash from an ATM or obtain cash equivalents from a bank or financial institution using their credit card.

Reasons why credit card cash advances can cause substantial losses:

1. Credit Card Cash Advance Facility: Banks impose significant charges

To utilise the credit card cash advance facility, users incur hefty charges imposed by banks, typically ranging from 2.5 to 3.0 per cent. E.g., a withdrawal of Rs 1 lakh could result in fees amounting to Rs 2,500 to Rs 3,000. Furthermore, unlike regular purchases that benefit from an interest-free grace period, interest begins accruing immediately on cash advances, exacerbating the financial burden on the user.

2. Credit Card Cash Advance Facility: Potential impact on credit score

While cash withdrawals don't directly affect the credit score, failing to repay the interest promptly can lead to rapid debt accumulation and a subsequent deterioration in credit scores. Interest accrues from the day of the withdrawal, accompanied by ongoing finance charges until repayment. Consequently, individuals risk becoming ensnared in a cycle of debt, adversely impacting their creditworthiness.

3. Credit Card Cash Advance: Withdrawal limits and prudent usage

The cash withdrawal facility is available to all credit card users, with the amount dependent on the card's limit. Most banks allow withdrawals ranging from 20 to 40 per cent of the total credit card limit. For example, if the card limit is Rs 5 lakh, cash withdrawals can typically range from Rs 1 lakh to Rs 2 lakh. However, it's advisable to resort to cash advance only in emergencies when no other option is available.

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