Almost the last resort: Why you shouldn’t take cash advances from your credit card


Cash-strapped Australians started taking cash out of their credit cards in droves just before Omicron hit late last year, alarming financial experts.

Reserve Bank data released on Wednesday revealed Australians took more than a million cash advances from their personal credit cards last November, just after Delta lockdowns eased in NSW and Victoria.

Hardline Wealth director and partner Cody Harmon is alarmed by the figures, saying he was surprised so many Australians were looking for cash given the rising popularity of cashless payments during COVID-19.

The value of personal credit card purchases reached $23.6 billion in November as well, but cash advances amounted to more than $400 million in the same month.

The risks of using a cash advance

Mr Harmon said cash advances can be risky, even if you are in a bind, and are “generally not recommended” by experts.

That’s because withdrawing cash from your credit card still adds to your debt and, according to Canstar chief spokesperson Steve Mickenbecker, will likely end up costing you more than regular credit card purchases.

If you resort to cash advances, Mr Mickenbecker said you should be aware that you will be paying a “pretty hefty” purchase rate (an interest rate applied to regular purchases made with a credit card).

He said that according to Canstar’s database, the average credit card’s purchase rate is 16.88 per cent, while the average cash advance purchase rate is a much higher 19.33 per cent.

If you are using an ATM to get your cash advance, he said you could also be on the hook for a one-off fee up to $5, but the biggest concern is the interest rate.

Mr Mickenbecker said resorting to the “bad habit” of using cash advances could leave you thousands of dollars in debt.

“If you think about a $3000 debt built up, well, $600 of that is just interest for a year,” he said.

“It gets hard to shift the stubborn credit card debt and you find that you risk getting into a bad spiral where you’re just really working for the bank.”

Tips before diving into a cash advance

Mr Mickenbecker said taking a cash advance should be “close to the last resort”, but gave his biggest tips on what to consider before going ahead with it:

Ask yourself: am I going to use the money for spending I actually have to do? If you are planning to use the money on discretionary spending, think about whether you should avoid spending money at all if you can’t afford it at the moment.
Make sure your credit card has a low interest rate, as you will be paying higher interest than your card on the cash rate. Consider switching cards to save some money.
Pay off your debt as fast as possible when you are back on your feet to avoid accruing even more debt.

What are the alternatives?

Considering the high interest rates and fees associated with cash advances, Mr Harmon said you would be better off getting a personal loan or looking into peer-to-peer lending.

“We’ve all been in the hurt locker financially,” he said.

“I’ve started a business and been short for cash, so I sort of understand some people are in a bind.

“And when they are, [they should] be looking more to flexible peer-to-peer lending solutions that provide much, much easier access to credit for individuals without as much underwriting and more favourable terms and flexibility.”

Peer-to-peer loans traditionally facilitate the matching of borrowers and lenders or investors over online platforms.

The loaned money comes from sophisticated investors, professional investors or the general public.

Mr Harmon said this way, you can quickly get the money you need to clear out your credit card debt.

This could leave you with a personal loan over five years at a lower interest rate, as opposed to a high interest rate on a cash advance, which is compounding against you.

Mr Harmon said it’s important to get rid of your credit card debt as soon as possible, particularly as inflation is expected to rise this year.

“It’s very important to get your cash flow under control and try and reduce debt now,” Mr Harmon said.

“Because how do we control inflation? Generally, we lift interest rates.

“And so those who have debt in an inflationary scenario generally get punished.”

We’ve Already Come Too Far To End This Now.

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