What is the difference between available credit limit and available cash limit?

Understanding the Difference: Credit Limit vs. Cash Limit on Your Credit Card

Your credit card offers a lifeline of financial flexibility, but understanding the nuances of its limits is crucial for responsible spending. Two key terms often cause confusion: credit limit and cash limit. While closely related, they represent distinct aspects of your borrowing power. This article clarifies the difference between the two.

Your credit limit represents the maximum amount you can borrow using your credit card in total. This encompasses all spending, including purchases at stores, online transactions, and even cash advances. It’s the overall ceiling on your credit card debt. Think of it as your total borrowing capacity. If your credit limit is $5,000, you can’t spend more than that, regardless of how you use your credit.

The cash limit, however, is a subset of your credit limit. It specifically restricts the amount of cash you can withdraw from an ATM or via a cash advance at a bank. This limit is usually significantly lower than your overall credit limit. For example, you might have a $5,000 credit limit, but your cash limit could be only $500 or even less. This restriction is in place because cash advances often carry higher fees and interest rates than regular purchases. Lenders want to discourage heavy reliance on this higher-cost borrowing option.

Here’s an analogy: Imagine a water tank representing your credit limit. The total capacity of the tank is your credit limit. Within that tank, a smaller compartment represents your cash limit. You can use the entire tank for various purposes (purchases), but only the smaller compartment for drawing out water directly (cash advances).

Why the difference?

Lenders impose a lower cash limit for several reasons:

• Higher Risk: Cash advances are generally considered riskier for lenders because there’s less traceability of how the money is spent. The lack of a specific purchase tied to the advance increases the chance of default.
• Higher Fees: Cash advances typically come with hefty fees, often expressed as a percentage of the amount withdrawn or a flat fee. These fees directly offset the lender’s increased risk.
• Higher Interest Rates: Interest on cash advances often starts accruing immediately, unlike purchases where there’s usually a grace period. This makes cash advances a more expensive borrowing option.

In short: Your credit limit is your overall borrowing power, while your cash limit is a specifically lower limit for cash withdrawals. Understanding this distinction helps you manage your credit responsibly and avoid unexpected fees and interest charges. Always check your credit card agreement to clearly understand both your credit limit and your cash limit.