Cash advance on credit cards - what you need to know

• Cash advance on credit cards - what is it?
• Is it a good idea to use credit cards for a cash advance?
• Will a cash advance on my credit card affect my credit score?
• What credit card transactions are considered cash advances?
• Can I pay my mortgage with a credit card?
• Can I withdraw cash abroad using my credit card?

Cash advance on credit cards - what is it?

Using your credit card to obtain cash, for example, withdrawing money at an ATM, is a credit card cash advance. In a way, it is like a short term loan, except instead of borrowing from a lender, you are borrowing cash from your credit card provider.

Many providers cap or limit the amount you can get with a cash advance. Another way to get a cash advance is using your credit card over the counter at your provider's branch (you may be asked for ID). But, there is a catch.

Is it a good idea to use credit cards for a cash advance?

First, there are costs with a cash advance on a credit card. And second, it will show on your credit report. If you use your credit card to withdraw cash, for example, daily interest will likely apply from the day you make the withdrawal. In other words, the interest-free grace period will not apply. Plus, the interest rates usually are higher than the rate you would pay for everyday purchases.

It's also likely your card provider will apply a cash advance fee. Fees can be charged as a fixed amount or as a percentage of the amount taken out. It may depend on the amount you withdraw or whichever charge is higher. This will be applied each time you take out money at a cash machine, so it's best to avoid making multiple withdrawals. Interest charges will vary depending on your provider. For example, some credit card providers don't charge fees for cash advances.

It's worth pointing out you don't get credit card purchase protection on products or services you buy using cash, even if you obtain the money at an ATM using your credit card. Under the Credit Act, purchases made between £100 and £30,000 using a credit card are covered by your card company if the goods or services are not delivered or supplied to the required standard.

Will a cash advance on my credit card affect my credit score?

A credit card cash advance will show on your credit report. This does not necessarily mean your credit score will be hurt, but what will particularly concern lenders is multiple cash advances showing on your credit report.

Some lenders may view multiple cash advances as a sign that you're struggling financially. Lenders may also take this as a sign that you have no money in your bank account.

As previously mentioned, a cash advance on a credit card is expensive, and interest is charged from day one. Multiple cash advances may make it hard for you to pay back what you owe to your card provider. Lenders know this and may view you as a potential risk.

Understanding what is a good credit score in the UK and what can impact it will help if you are looking to apply for a personal loan or any other type of credit. A lender will likely check your credit report  before approving your application, so it helps to review and take steps to improve it before applying.

It may be surprising that taking out money from a cash machine or at a bank branch is not the only transaction viewed as a cash advance on credit cards. We list some of these in the next section.

What credit card transactions are considered cash advances?

• Paying your electricity bill  and other utility providers
• Buying physical currency, travel money, traveller's cheques or digital currency
• Topping-up payment cards like prepaid cards, digital wallets or e-money accounts
• Buying gift vouchers
• Transactions made at casinos and betting outlets
• Making an electronic cash transfer, for example, transferring money from your credit card to a bank account
• Paying for government fines or fees
• Buying stocks, shares and cryptocurrency

Can I pay my mortgage with a credit card?

Most UK mortgage providers do not accept payments using credit cards. Mortgage payments are collected by direct debit, so it's unlikely a lender will accept a different payment method. However, there may be some circumstances where exceptions are made. 

Secondly, if your mortgage payment is accepted using a credit card, your card provider may view it as a cash advance. As a result, and as mentioned before, a fee will likely apply as well as higher interest rates. Interest will be charged from day one until it is paid back (no grace period will apply). If your credit card payment is rejected, it could adversely affect your credit score.

Can I withdraw cash abroad using my credit card?

Like most debit cards, you can use your credit cards overseas, including at cash machines. However, taking out money from a cash machine with a credit card while overseas is still considered a cash advance, so fees and interest charges apply in the same way as at home. Plus, you will be charged a foreign transaction fee.

Typically, foreign transaction fees are charged as a percentage of the amount you decide to withdraw. A foreign transaction fee is a currency conversion fee that applies to most non-Sterling transactions you make. The amount you are charged is down to your card provider, so be sure to check their terms and fees.

One final tip on using your card abroad, you may be asked if you want to withdraw or pay at the local currency rate or in Sterling. It's nearly always cheaper to withdraw or pay at the local currency rate.

Your credit card provider will provide the conversion rate when you choose the local currency rate. If you decide to pay in your home currency and not the local currency, the conversion occurs at the point of sale or ATM. That means the ATM provider, shop or restaurant can set their own rate and add extra conversion fees too. This can apply to credit, debit and prepaid cards, whether it's at a cash machine or point of sale.

If you are planning an overseas trip, you may find travel currency cards offer a more competitive foreign exchange rates and a convenient alternative. Additionally, multi-currency accounts like Wise (previously known as TransferWise) can hold up to 53 international currencies and allow you to transfer unused, leftover foreign currencies back into Sterling.

In summary

There are three things to be aware of when it comes to cash advances on credit cards:

• First, you may have to pay a fee for this service.
• Second, you pay interest from the day you use the service (there is no grace period), and the interest rates are usually higher than the interest charged on regular purchases.
• Third, it will show on your credit report history.

Depending on your card provider, paying utility bills, transferring money from your credit card, buying currency, stocks, shares and other similar transactions with a credit card can be viewed as cash advances. Also, be aware of the additional costs of withdrawing cash with a credit card at an overseas ATM.

Does this mean you should never take a cash advance on credit cards? No, there may be one-off situations where you need cash and have no other option. For example, you may have to pay an unexpected bill. Or you need cash, and you have lost your debit card. But a bit like payday loans, it's essential to understand a cash advance on a credit card is an expensive way to borrow money, so you should avoid repeatedly using this service.

If you want to know what your provider will charge you, details are generally shown under the "fees and charges" section of the terms and conditions. You may also find this information in the "Key Facts Summary". Otherwise, if you have any doubts, contact your credit card provider directly. If you are looking to get a credit card, be sure to shop around for the best deals and compare credit card costs and perks.