I was checking my credit card bill and I see something called cash advance fee. Can you tell me what is it?
The concept of a cash advance fee on credit cards is actually quite simple. Sometimes you might need cash urgently, but your savings account balance is low. In such cases, you could go to an ATM, insert your credit card instead of your debit card, and withdraw ₹10,000. What you’re doing here is not making a purchase, it is borrowing cash directly from your card provider, essentially taking a short-term loan.
To address your concern about what is the cash advance fee on a credit card, let me show you what happens behind the scenes:
- Your card provider charges a minimum fee of up to ₹500 or a 2% to 5% charge on the advance amount (whichever is higher).
- As I said before, it is not a regular credit transaction, so you get no interest-free period.
- Combined with interest, it makes cash withdrawals one of the most expensive ways to borrow money.
Now, continuing with the example, say your card provider charges 3% as an advance fee right away. So you are now liable to pay ₹300 as the advance fee, and your repayment amount before interest is ₹10,300.
Therefore, I would suggest you not use your credit card for cash withdrawal unless it is an emergency.