Quick access to cash can be a lifeline in a financial emergency or unexpected expenses. There are several ways to get cash quickly if you are low on funds, one of them being a cash advance from a credit card, which allows you to use your card to get a loan. short-term money in a bank or ATM.
But beware: credit card cash advances are very expensive.
You borrow against your credit limit to put money in your pocket, typically at a higher interest rate than on regular credit card purchases. And you will usually have to pay transaction fees as well.
“I suspect this mostly happens in an emergency, or that it is just a very bad choice for an inexperienced consumer,” says Mike Sullivan, personal financial advisor at Take charge of America, a national not-for-profit credit counseling and debt management agency.
“But it’s almost always a bad decision.”
The best way to avoid getting into more debt is to know exactly what you are getting into. Here’s everything you need to consider before purchasing a cash advance.
How does a credit card cash advance work?
A credit card cash advance is similar to withdrawing money from an ATM with your debit card, except that the money comes from your credit card instead of your checking account – and you have to pay it back.
âIt’s technically a loan,â says Todd Christensen, financial advisor and education manager at the nonprofit debt relief agency. Money Fit by DRS. âYou take money out that you have to pay back with a high interest rate, usually 25-30%, with no grace period. “
The process for getting a credit card cash advance is straightforward. You can enter your credit card PIN at an ATM (this is different from your debit card PIN) or use a convenience check sent by your credit card issuer to withdraw money in a bank. There are limits on how much you can withdraw, usually between 10% and 40% of your total credit limit.
If you have no choice but to take a cash advance on your credit card, you can minimize accrued interest by paying off the balance as quickly as possible.
Unlike a personal loan, this type of advance is linked to your credit card and you can repay it indefinitely, provided you make minimum payments. However, only making minimum payments will cost you money over time because the interest rate on credit card cash advances is so high.
The costs of a credit card cash advance
Before embarking on a credit card cash advance, there are several fees to consider:
- Interest charges: When you take a cash advance, the bank adds interest to the amount you withdraw. As a rule, interest begins to accrue immediately. The average interest rate for a cash advance is almost 25%, according to recent data from CreditCards.com.
- Cash advance fees: These are the fees you have to pay to withdraw money from your credit card. This is usually 5% of the transaction or $ 10, whichever is greater.
- ATM fees: These fees may vary. They can range from $ 2.50 to $ 5 or more, depending on which ATM you use. It won’t cost you anything if you use your bank’s ATMs. But any transaction made with an off-network ATM will usually incur a fee.
Let’s say you withdraw $ 200 from an ATM using your credit card. Upfront, you’ll pay a $ 10 (5% of $ 200) cash advance fee. You may also need to pay an ATM fee, which can cost up to $ 15 just to get the cash advance. And you’ll start earning interest immediately at, say, 24%. If you don’t pay your bill before the first statement arrives after your withdrawal, you’ll owe about $ 48 in interest.
Pay off a cash advance balance
If you’re already struggling with credit card debt, a cash advance can take you into a deeper hole.
Suppose you have a balance of $ 2,000 on your credit card and your card charges an interest rate of 18%. Then you decide to take out a cash advance of $ 300, which can be accompanied by 25% interest.
Minimum payments generally apply to the balance with the lowest interest rate (in this case, your previous balance of $ 2,000). So if you only pay the minimum, your cash advance debt could quickly swell. It could take months or years to pay off. You will also be spending a lot in fees and interest.
This is why it is essential to read your credit card agreement before making a cash advance. If you decide to take out a cash advance, only withdraw what you need and pay it back as quickly as possible.
Alternatives to credit card cash advances
If you’re considering a cash advance, it’s probably a sign of a bigger financial problem. It might be time to align your budget with your spending habits.
Sullivan says people who take cash advances are more likely to default on their credit card debt, which is part of the reason why the interest rates on cash advances are so high.
You can avoid needing a credit card cash advance by planning ahead. It is recommended that a portion of your income be paid into an emergency fund on a regular basis, in case you encounter unforeseen expenses.
“If your credit is good enough that you have plenty of credit available and you can get a cash advance on your card, then you probably have better options or can access another form of borrowing that will cost you a lot less.” dear, âSullivan said.
Work with your credit card issuer
For many people, credit cards can be a source of relief when money is tight. But credit card debt can also add up quickly and lead to long-term financial problems. If you’re having trouble paying your credit card bill, contact your issuer as soon as possible to discuss your options.
During the coronavirus pandemic, many credit card issuers were more willing to accept flexible payment terms, such as postponing minimum payments, removing late fees and increasing lines of credit. It can help free up money for other necessities.
There are also credit card payment plans that may be available on any of your cards. For example, large issuers like American Express, Chase, and Citi offer these more flexible financing options on existing lines of credit. Some of the benefits are lower interest rates and more clearly defined repayment schedules.
Consider a personal loan
If you have good credit, getting a personal loan from a bank or credit union is probably cheaper than a cash advance with a credit card. Interest rates from credit unions tend to be lower. Research your options and consider speaking with a representative to see which personal loan would be best suited to your financial situation.
Borrow from friends, family or yourself
It might seem awkward to ask relatives or friends for a free or low interest short term loan, but it could save you a lot of money in the long run. Know that it’s okay to ask for help, as long as you are honest about your situation. If the idea of ââborrowing from friends or family doesn’t appeal to you, you can also consider borrowing on your own through your 401 (k) plan. Under the CARES Act, withdrawing a 401 (k) and paying it off on time is not the worst option if done for the right reasons.