The overlooked cost of borrowing against your own credit line

While the majority of credit card users are aware of the ability of their credit cards to withdraw cash from an ATM, few of them realize just how much these two transactions differ. Cash advances here mean withdrawals made using credit cards instead of spending the card balance to make purchases. These transactions come at additional expenses that usually shock first-timers when they appear in the billing statement. In some cases, they even refer to purchases made that do not look like simple cash advances, such as exchanging money into foreign currency or gambling chips.

Firstly, a fee is charged. Almost all of the card issuers charge their customers for the use of a credit card for withdrawing cash. They take a percentage of the withdrawn sum right away. Second, there is a more important factor – interest. Purchases made on most credit cards enjoy an interest-free period if paid in full at the end of every month, but this type of withdrawal starts earning interest right away without any grace period, and it often earns interest at a much higher rate than that charged on purchases. Together, these two make a cash withdrawal on a credit card one of the costliest methods of accessing funds via an existing credit facility.

There is also a consequence of this method of withdrawing money from a credit card. It is because of the fact that this type of withdrawal utilizes the available credit limit in the same way as purchases, and thus results in the utilization of the credit limit of a person. As the credit utilization ratio is a factor credit bureau weigh when assessing new applications for credit facilities, even a small cash withdrawal can affect the cardholder's future credit applications, especially if it becomes a recurring habit.

It should be emphasized that a cash advance using a credit card is not the same type of lending as the short-term loans offered by some online lenders, which are marketed using similar terminology; in fact, the two are completely different products. Although they have some similarities in terms of the concept and the way they operate, their costs, terms, and even the regulation are quite different, making direct comparison misleading.

In case you need to get fast money from time to time, knowing how a cash advance is charged - the flat fee and the interest from day one - makes it easier to make sure that it really is the best choice, or just the easiest one at the time. Sometimes, just a short preparation period, checking the terms of a credit card for cash advances, or choosing another cheaper option, for instance, a small personal loan, can help you save quite a bit of money.

James Pickering is the author of this article. To know more about online loans, Please visit our website: myfinancialbroker.co.uk.