Ever wonder how Cinderella feels when she desperately wants to be in the royal ball but there was no way to get there? Then suddenly (viola!) her fairy godmother appears to make her dream come true. You might experience the same feeling if you crashed into a dire financial situation and you can’t get your hands to instant cash at the moment. Then you suddenly remember that you can withdraw some cash with your credit card. Credit card cash advance is like your own personal fairy godmother. However, unlike Cinderella who lived happily ever after, the cash advance has hidden consequences.
Though cash advance sounds like a great advantage with credit cards, you must be keen with using it. The cash advances are simply short term loans with very high inerest rates you get from the bank. Yes, banks can provide quick cash loans, but it could cause an arm and a leg over time if you are not careful. The bank allows you to withdraw a certain amount of cash within your credit limit anytime you need it. You just have to key in the PIN you received when you got your credit card. And most credit card cash advances have no minimum amount, though UOB’s minimum cash advance is S$200.
Cash Advance Interest Rate is not the Credit Card Interest Rate: Settle ASAP
While it is true that the credit card interest rate will only be charged if you missed settling your balance on its due date, it is different with the cash advance. Cash advance has a separate interest rate which is about 3% higher than the credit card’s interest rate. Once you withdraw the cash, you will automatically be charged with its compounding interest.
The compounding interest is not based on the principal loan, but rather it is computed on the latest balance. If you got a cash advance worth S$1,500 with an HSBC credit card, it will be charged with a compounding interest rate of 28% per annum. DO NOT expect paying S$1,920 after a year. Instead you will end up paying an outstanding balance of S$1,984.48 after a year of cash advance.
The formula for annual compound interest is A = P (1 + r/n) nt
- A stands for the balance you have to repay (cash advance with the interest rate)
- P is the cash advance you withdrew from the ATM
- r will be the annual interest rate to be written in decimal form
- n is the number of times that interest is compounded per year. Since you are charged daily from the time you had the cash advance, we will assume 365 days if you do not pay for a year.
- t is the number of years you might not repay. Let’s assume this is only one year.
Cash Advance: S$1500
Interest rate per annum: 28%
1500(1 +0.28 / 365)365(1) = S$1,984.48
Your total interest rate in a year will be S$984.48, so your outstanding balance is S$1,984.48.
But if you are expecting for the grace period when you will not be charged with any interest rate due to promo, be prepared to be disappointed as this will not be applicable.
You are charged with a Cash Advance Fee
Aside from the interest rate, banks also have other fees to add on your bill. Though you are happy to get cash as soon as possible, you need to remind yourself that you are being charged with a cash advance fee.
Most bank charges 6% of the cash advance amount you got or S$15. If we still use the same example above: cash advance of S$1,500 through HSBC credit card, you will be charged with S$75 aside from the 28% interest rate.
Your other options
Cash Advance may sound useful (and it actually is), however, it comes with high interest rate and fee. If you don’t settle the as soon as possible, it could keep on ballooning into a big debt. Also, if you miss paying on your due date, the interest rate is likely to go higher together with the interest rate of the credit card. So before you get a cash advance, it is better to utilize your other options first.
- Borrow from family and friends
Most Singaporeans may not feel comfortable with borrowing money from their family and friends. Financial status can be a big deal to many, and borrowing money only shows a person’s inability to handle finances well. Another reason many are not considering this option is that financial and personal relationships are best kept apart. Turning a relationship into a financial transaction is not very ideal. Trust is put on the line, and if you were unfortunately unable to pay on time, you might end up losing a friend.
- Ask your boss for advance salary
There are some employers who are willing to give part of the salary in advance, however most of them will see this as a negative point. Employees who have debts may be too stressed to work well and if you have a promotion on the way, this might tarnish your image and risk your chance of climbing up the career ladder.
- Get a personal loan
Personal loans from licensed money lenders are flexible and easily get approved. You can get your loan in a day provided that you are able to provide all the required information and documents. In addition to the quick loan process, you can use the cash in any way you want and get lower interest rate compared to the cash advance EIR. Monetary Authority of Singapore mandates licensed money lenders to limit their monthly interest rate to 4%. When you get a personal loan to settle your debt, be responsible and pay diligently to also keep your credit score in good shape.
If you need a flexible loan from a reputable licensed money lender, you can get it today from Cash Mart.
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