There are many reasons why cash advances from a credit card are a bad idea. Interest on cash advances is usually around 20% (even if the purchase rate is below 11%) and they incur a 'Cash Advance Fee' of 1% - 3%. They also don't enjoy the same interest free period as purchases.

But banks have thus far neglected to justify their position on cash advances. Why do banks apply penalty rates and fees for getting cash out from your credit account? How is a cash advance any different to the personal loans banks offer at 10%-11%?

The 'Cash Advance Fee' is applied to cover the bank's administrative costs for processing the transaction. You don't pay this fee when you make a purchase from a store because it's paid by the merchant.

The higher interest rate (and the exclusion of an interest free period) is due to the additional risk incurred by the bank. Cash transactions have been shown to have a significantly higher risk of default, perhaps because the act of withdrawing cash from a credit account indicates financial distress - anyone withdrawing cash from their credit card probably doesn't have any money left in their savings account.

Cash advances also don't yield any redeemable assets. When you purchase a diamond ring on your credit card, the bank has an item of value they can repossess if you fail to meet your repayments. On a cash advance, there is no such asset. Cash has a way of disappearing.

Banks can afford to offer personal loans at a lower rate because they have more stringent lending criteria and scrutiny of applicants. A personal loan usually requires some form of security (such as a guarantor).

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