Why Credit Card Cash Advance Is Your Colossal Financial Trap

Understand why credit card cash advance is your colossal financial trap. It might save you from a dire financial situation.

Ever wonder how Cinderella feels when she desperately wants to be in the royal ball, but there is no way to get there? Then, suddenly (viola!) her fairy godmother appears to make her dream come true.

You might experience the same feeling. For example, being in a dire financial situation but can’t get your hands to instant cash at the moment. Then, you suddenly remember that you can withdraw some money with your credit card.

A 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 a credit card, you must be keen on using it. It is because the cash advances are short term loans. But it comes with very high-interest rates you get from the bank. So, yes, banks can provide quick cash loans. However, it could cause an arm and a leg over time. So, always be careful.

The bank allows you to withdraw a certain amount of cash anytime you need it. It must be within your credit limit. You have to key in the PIN you received when you got your credit card. Most credit card cash advances have no minimum amount.  However, UOB’s minimum cash advance is $200.

Credit: https://www.finder.com/what-is-defined-as-a-cash-advance

Cash Advance Interest Rate is not the Credit Card Interest Rate: Settle ASAP.

Indeed, the credit card interest rate will only be charged if you missed settling your balance on its due date. But, it is different from the cash advance.

Cash advance has a separate interest rate. It 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 from the principal loan. Instead, the computation is on the latest balance. If you got a cash advance worth $1,500 with an HSBC credit card, the compounding interest rate charged is 28% per annum.

DO NOT expect to pay $1,920 after a year. Instead, you will end up paying an outstanding balance of $1,984.48 after a year of cash advance.

The formula for annual compound interest

 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 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 take this is only one year.

Sample Computation

Cash Advance: $1500

Interest rate per annum: 28%

1500 (1 +0.28 / 365) 365 (1) = $1,984.48

Your total interest rate in a year will be $984.48. So your outstanding balance is $1,984.48.

Are you expecting the grace period when there’s no interest rate due to the promo? Be prepared for disappointment. It will not apply to this expense. That’s why credit card cash advance is your colossal financial trap. 

A charge called Cash Advance Fee.

Aside from the interest rate, banks also have other fees to add to your bill. So, yes, you are happy to get cash as soon as possible. But you need to remind yourself about a cash advance fee.

Most bank charges 6% of the cash advance amount you get or $15. If we still use the same example above HSBC credit card cash advance of $1,500, the charge is $75. It is aside from the 28% interest rate.

Your other options

Cash Advance may sound helpful (and it actually is). However, it comes with a high-interest rate and fee. If you don’t settle them as soon as possible, it could keep on ballooning into enormous debt.

Also, if you miss paying on your due date, the interest rate is likely to go higher together with the credit card’s interest rate. 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 borrowing money from their family and friends. Also, financial status can be a big deal to many. It shows a person’s inability to handle finances well.

Another reason is that financial and personal relationships are best if apart. Turning a connection into a financial transaction is not very ideal. Trust is on the line. If you were unfortunately unable to pay on time, you might end up losing a friend.

Ask your boss for an advanced salary.

Some employers 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. If you have a promotion on the way, this might tarnish your image. Also, it is a risk to your chance of climbing up the career ladder.

Get a personal loan

Personal loans from licensed money lenders are flexible and quickly get approved. You can get your loan in a day. So 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 a 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. Also, pay diligently to 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.