A credit card advance refers to the process of obtaining cash from an ATM or bank using a credit card. It is an alternative source of funding for people who need money in an emergency or for those who do not have access to traditional forms of credit. While credit card advances can provide quick access to cash, they are also associated with high-interest rates and fees, making them an expensive form of borrowing. In this article, we will explore the concept of credit card advances, its implications, and how it works.
How does a Credit Card Advance Work?
A credit card advance works in much the same way as a standard credit card purchase. The main difference is that instead of using a credit card to purchase goods or services, the cardholder uses it to withdraw cash from an atm or bank. The amount of money that can be borrowed using a credit card advance is determined by the credit limit of the card. Most credit card issuers allow cardholders to withdraw up to a certain percentage of their available credit limit.
Interest Rates and Fees associated with Credit Card Advances
Credit card advances are associated with high-interest rates and fees. Unlike standard credit card purchases, which typically have a grace period of 21 to 30 days, credit card advances start occurring interest from the day they are taken out. The interest rate charged on credit card advances is typically higher than the rate charged on standard credit card purchases, making them an expensive form of borrowing.
Impact on credit scores
Credit card advances can harm credit scores. This is because credit card issuers report cash advances to the credit bureaus as separate transactions from standard credit card purchases. This can harm the credit utilization ratio, which is one of the most important factors that credit bureaus use to calculate credit scores. The credit utilization ratio is the amount of credit being used compared to the total amount of credit available. A high credit utilization ratio can indicate that the cardholder is overextended and is more likely to default on their debt.
Alternatives to Credit Card Advances
Credit card advances should be used as a last resort when other sources of funding are not available. There are several alternatives to credit card advances that are less expensive and less damaging to credit scores. These alternatives include:
Personal loans:
Personal loans are unsecured debts that may be applied for in any way. They typically have lower interest rates and fees than credit card advances, making them a more affordable option for borrowers.
Payday loans:
Payday loans are short-term loans that are intended to be repaid on the borrower’s next payday. They are often associated with high-interest rates and fees, making them a costly option for borrowers.
Emergency savings:
Emergency savings are a reliable source of funding for unexpected expenses. It is recommended that individuals maintain at least three to six months’ worth of living expenses in a savings account to cover unexpected expenses.
Borrowing from friends and family:
Borrowing from friends and family is a convenient option for those who need money in an emergency. This option is typically less expensive than credit card advances, and the loan can be repaid over time.
Also Read: What are Credit Card Frauds?
Conclusion
Credit card advances can also negatively impact credit scores, as they are reported as separate transactions from standard credit card purchases. It is recommended to use credit card advances only as a last resort when other sources of funding are not available. Alternatives such as personal loans, payday loans, emergency savings, and borrowing from friends and family can be more affordable and less damaging to credit scores.
