Credit Card Cash Advances

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When it comes to managing money, the quickest solutions usually aren't the best.

Credit card cash advances give you a fast way to get your hands on some money, but they're also one of the most costly, high-risk solutions for getting cash.

Before you take a cash advance from your credit card, make sure you understand the risks and understand the better alternatives listed below.

What Is a Credit Card Cash Advance?

With a credit card cash advance, you can visit your bank or an ATM to withdraw money from your credit card account. It may seem sort of like turning your credit card into a debit card.

But most customers don't realize that cash advances are actually high-risk loans. When you take out an advance, you start incurring interest charges right away, and you'll pay ultra-high interest rates from 27.24% to 28.24%, depending upon what card you’re using.

For that reason, many credit card companies recommend avoiding credit card cash advances if you're not in an emergency. Even if you are in an emergency, you can likely find lower-risk ways of getting cash.

Money Minute - Beware of Cash Advances

How Do Credit Card Cash Advances Work?

You can usually get a credit card cash advance for an amount that's equal to a small percentage of your credit limit. The amount you withdraw, plus fees, will be deducted from your available credit.

There are a couple of ways to take a cash advance from your credit card, and each one comes with a different set of fees:

  • Withdraw the money from an ATM
  • Use a convenience check from your creditor
  • Visit your bank branch

The Costs Associated with Cash Advances

When it comes to fees, cash advances rank amongst the most expensive types of loans. Here's how much it can cost to take out a credit card cash advance:

  • Interest Charges: The interest rate for your cash advance will be much higher than the rate for your credit card, and the average rate for credit cards is already high, at a whopping 16.27% APR. Interest charges typically accrue every single day until you pay off the full balance.
  • Cash Advance Fees: You might be charged a flat fee for the advance, or a percentage of the amount you withdraw. Fees are typically $10, or 5% to 6% of the cash advance amount, whichever is greater.
  • ATM Fees: You might be charged a few dollars by both your creditor and the ATM company if you use an ATM that's not in your creditor's network.

To find out how much your credit card company charges for cash advances, you can check the cardholder member agreement or your last credit card statement.

How to Avoid Cash Advance Fees

If you can think of any other way to get cash, it's probably better than using a credit card cash advance. Here are some options that are likely to cost you far less:

  • Use your credit card for the purchase.
  • Take out a personal loan or a small Payday Alternative Loan (PAL) from your credit union.
  • Borrow money from a friend or family member.

If you do end up taking out a cash advance from your credit card, you can minimize the fees by borrowing as little money as possible and paying it off as soon as possible.

When To Use Cash Advances

Banks, credit unions and credit card companies recommend avoiding using credit card cash advances.

You can get cash advances from a variety of lenders, but it should be your last choice when dealing with a financial emergency, since the advance will accrue major fees and is likely to create more financial problems for you down the line.

Credit Card Cash Advance Limits

The amount of money you can get for a cash advance will depend on your credit card provider. Typically, you can borrow between $100 and 30% of your credit limit, with fees included in your total advance amount.

For example, if your credit card limit is $10,000 and your creditor allows 30% maximum (or $3,000) and charges a 6% fee ($180), the most you can have advanced to you is $2,820 ($3,000-$180).

The amount you withdraw, plus fees, will be deducted from your available credit on the credit card account.

Does a Cash Advance Hurt Your Credit Score?

Taking on debt typically hurts your credit scores. The more money you borrow, the bigger the loss of points you'll experience.

That's because credit utilization is the second most important factor in determining your credit scores, just after payment history. Credit utilization, or the amount you owe in comparison to your credit limits and original loan balances, accounts for 30% of your FICO scores.

If you want to make improvements to your credit utilization, the best way you can do that is by paying down your credit card debt and your loan balances.

How To Avoid Credit Card Cash Advances

With some preparation, you can reduce your chances of having to use risky loans like cash advances.

One of the best ways to prepare for financial emergencies is to put money into an emergency fund.

While most experts recommend saving 3-6 months of your living expenses for emergencies, it's important so start with any amount you can spare, even if it's just $25 a month that automatically goes into your savings account.

If it doesn't feel like you can save money right now, you might want to take a look at your budget. Making a list of your income and all of your expenses can help you find opportunities to reduce or eliminate spending, even if it's just temporarily.

Of course, squeezing every penny out of your budget might not get some people very far. If your income is limited, try brainstorming ways to bring in more money, like asking for a raise, switching jobs or careers, getting a second source of income, or applying for financial support through a nonprofit or government relief program.

Credit Card Cash Advance Alternatives

If you can think of any other way to get cash, it's probably better than using a credit card cash advance. Here are some less risky, and likely far less expensive options to consider first:

  • Use your credit card for the purchase instead of paying with cash
  • Take out a personal loan or a small Payday Alternative Loan (PAL) from your credit union
  • Borrow money from a friend or family member

Differences Between Personal Loans and Cash Advances

A personal loan can be an affordable alternative to taking out a cash advance. Personal loans generally have far lower interest rates than cash advances and, unlike with a cash advance, the lender may not charge any fees.

If you need money to buy a vehicle, consider an auto loan instead of a cash advance, since secured loans — loans that have property as collateral — tend to have lower rates than unsecured personal loans.

Cash Advance Repayment

Repaying a credit card cash advance can be expensive.

When you make a charge on a credit card, you have a grace period, typically 30 days, to pay off your full balance and avoid interest charges. That is not the case with credit card cash advances.

When you take out a cash advance from your credit card, you'll pay interest charges starting on day one of getting the cash, and you'll accrue new charges every day until you've paid off the full amount.

That's why if you do decide to take out a cash advance, it's important to have a plan for how you'll pay it off right away.

Speak to a Nonprofit Credit Counselor to Explore Better Options

It can be hard to think straight when you're in a financial emergency. Fortunately, a trained professional is available to offer help.

A nonprofit credit counselor from InCharge Debt Solutions can review your income and expenses, offer objective insights on how to improve your situation and suggest the best options for covering an emergency. You can contact InCharge Debt Solutions to learn more about credit counseling and get free or low cost debt help.

About The Author

Sarah Brady

Sarah Brady is a Personal Finance Writer and educator who's been helping people improve their financial wellness since 2013. Sarah writes for Experian, Investopedia and more, and she's been syndicated by Yahoo! News and MSN. She is a workshop facilitator and former consultant for the City of San Francisco's Affordable Home Buyer Programs, as well as a former Certified Housing & Credit Counselor (HUD, NFCC). Sarah can be contacted via sarahcbrady.com.

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