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A cash advance is a short-term loan taken from your card’s line of credit. While it might seem like an obvious choice when you need money fast and don’t have other funds, it’s also an expensive type of debt that should be avoided whenever possible.
Here’s how cash advances work and what other options you can use to get cash fast.
How does a cash advance work?
How to get a cash advance on your credit card
A cash advance allows you to withdraw money from your credit card just as you would from your debit card account:
If you have a credit card with a PIN, you can use an ATM to get a cash advance just like you would with a debit card. Most likely, you will need to go to your bank or credit union and request a cash advance on your credit card. The representative will execute your card – and the bank or credit union and credit card issuer may apply a fee – and then give you the cash amount requested.
Cash Advance Terms and Fees
When you take out a cash advance, you use the available balance on your credit card to take out a cash loan. This type of transaction is treated differently from your usual purchases and your credit card issuer will charge you a different interest rate.
Here are the typical terms and fees for a credit card cash advance:
- Cash advance APRs are typically higher than regular card APRs
- There is no grace period – interest on a cash advance accrues immediately
- Cash advance fees, whether a percentage of the advance or a fixed dollar amount, are usually added and charged to your credit card account.
- Your bank or credit union may also apply fees and charges to credit card cash advances.
Credit card cash advance terms and fees also vary by credit card issuer. Here are the terms and fees for popular cards from some of the major issuers:
*The one who is the greatest
How much will a cash advance cost?
The main appeal of cash advances is convenience, but cash advances are expensive.
Let’s say you have a credit limit of $2,500, with $1,000 already charged, and you take out a $700 cash advance. If you use the Capital One Quicksilver Rewards Card, you will immediately pay an additional variable APR of $21 and 24.99% on that $721. With the Citi personalized charge card, you will immediately pay a variable APR of 25.24% on $735.
How a cash advance can affect your credit score
When it comes to credit reports, a cash advance is treated the same as the rest of your credit card debt. This means it will not appear on your credit report as a separate item. However, it can still impact your credit.
“A cash advance can impact your score if you withdraw too much money,” says Howard Dvorkin, CPA and president of Debt.com. “The more money you withdraw, the closer you will get to your credit limit. Maximizing your line of credit or using more than 30% of your credit limit can hurt your credit score.
Since interest and fees on cash advances add up quickly, they can easily increase your credit utilization rate, especially if your card’s credit limit is low.
“To help protect your score… see if your credit card company will increase your credit limit if you absolutely must complete a cash advance transaction,” suggests Dvorkin.
Advantages and disadvantages of a cash advance
Benefits of a cash advance
- No credit check. As you already have access to the line of credit, a credit check is not necessary to enable you to take out a cash advance.
- Lower APRs than Payday Loans. If you’re in dire financial straits and don’t have the credit to get a personal loan, the APR of a cash advance will likely be lower than that of a payday loan.
- Immediate Funds. Credit card cash advances let you get the money you need in one quick trip to a bank or ATM.
Disadvantages of a cash advance
- Immediate interest charges. While regular purchase APRs accrue at the end of each billing cycle, credit card cash advances accrue interest immediately.
- Increases credit utilization rate. When you borrow money against your credit limit, your credit utilization rate increases, which can negatively impact your credit score.
- Higher APR than personal loans. Credit card cash advances have higher interest rates than a personal loan and earn interest immediately, so you’ll likely pay more with a cash advance than with a long-term personal loan.
It is understandable that needing money when there is none available can be a terrible feeling and put a lot of stress on you. In emergency situations, it can seem crucial to obtain funds immediately, regardless of the financial and credit consequences.
Another option to consider is a personal loan. The average 24-month personal loan rate is around 9.58%, which is well below the APR on a credit card cash advance. Even if your credit score isn’t in top shape, chances are you’ll find a personal loan with a lower interest rate than a cash advance.
It’s also convenient to be able to repay the loan over time in fixed installments instead of worrying about racking up interest charges and hurting your credit utilization rate. Additionally, you may be able to get a larger sum, as cash advances are often capped at a few hundred dollars.
At the end of the line
It can be extremely stressful to need money urgently and have none. Without an emergency fund or any savings, you can feel like you have virtually no options. However, a cash advance should only be considered as a last resort.
If you’ve considered the alternatives and conclude that you don’t have cost-effective options, be sure to calculate exactly how much a cash advance will cost you and create a plan to pay it back as quickly as possible.