A credit card cash advance is a service offered by your credit card issuer that allows you to withdraw cash from your available credit limit at a financial institution or an ATM. This type of short-term cash loan can seem like a good idea, especially when facing a financial emergency or a situation that requires immediate cash. The convenience of a cash advance comes at a price, however, which is best to avoid if possible.
There are two main types of cash advances for personal use: credit card cash advances and payday loans. Read more about payday loans and the hidden fees associated with them.
Costs of a cash advance
Credit card cash advances are associated with many additional fees that make them expensive and undesirable. Some costs you should consider before using a cash advance include:
Cash advance fee
A one-time fee is charged for taking a cash advance, usually ranging from 2-5% of the cash advance amount. For example, a $400 cash advance would result in a fee of $8 to $20 being added to your account balance.
If you withdraw a cash advance from an ATM, you’ll pay a fee that usually ranges from $2 to $5, depending on the ATM. Both the ATM machine and your credit card issuer may charge this fee.
Higher interest rate
Cash advances usually charge a higher annual percentage rate (APR) than regular purchases and balance transfers. This is partly because cash advances can signal greater risk for the credit card company, and partly because people are generally willing to pay more for the convenience of the service.
No grace period
Credit cards typically give you a grace period to pay off your balance before interest is charged. With a cash advance, however, interest begins accruing from the very first day the transaction clears your account.
Lower credit limit
Some credit cards have a separate credit limit for cash advances, which is lower than your overall credit limit.
Are there any benefits?
The only benefit to a credit card cash advance is the convenience factor—it is a simple way to get fast cash when you need it. Because using a cash advance is likely to cost you more overall, some other possibilities to consider are:
- Borrowing money from family or friends. If this is an option, you can avoid paying the interest and fees that accompany other types of loans altogether.
- Taking out a personal loan. While applying for a personal loan isn’t as quick and easy as a cash advance, it could result in a more reasonable interest rate if you qualify. You may also be eligible for a larger amount of money with a personal loan than with a cash advance.
- Overdrafting your checking account. While overdrafting your checking account isn’t recommended, the typical $35 fee charged for a negative balance may ultimately be less than the cost of a cash advance. Be careful, though, because some banks also charge extended overdraft fees for leaving your balance negative for a period of time.
- Generating extra cash. Try earning the extra money you need with a part-time job, or by selling things of value that you already own. By hosting a garage sale or selling items online or with an app, you could potentially raise enough money to avoid borrowing.
Reasons for a cash advance
While it’s reasonable to imagine a cash advance being used in a true emergency—like when your car breaks down and the towing company doesn’t accept credit cards—many people mismanage their money and use cash advances to bail themselves out of trouble. Even if a cash advance is used to pay an overdue bill, unexpected medical fee, or vehicle repair, it points to a deeper financial problem.
The best solution is to make sure you have enough funds to cover your expenses in the future. If you haven’t already created a personal budget, it’s a great way to organize your monthly bills, spending, and savings to live within your means. It’s also important to start an emergency fund, and your budget can help you plan how much and how frequently to contribute.
If a cash advance seems unavoidable now, be sure to find out the associated interest rate and fees first. Do not borrow more money than you actually need, because it can be more difficult to repay and can also negatively affect your credit utilization ratio, which is tied to your credit score. Most importantly, create a plan to repay the cash advance as quickly as possible. The faster you repay your loan, the less interest you’ll be charged.