Credit cards are all about convenience. With one swipe, anything we want or need is right at our fingertips; and that includes cash. That convenience comes at a steep price, however — quite literally.
Credit cards call it a “cash advance” when you use them to take cash out at an ATM, or use one of their convenience checks to pay for purchases (for example, when the vendor doesn’t take credit cards, but will take a check).
Here is what you need to know before even considering a cash advance, and some alternative solutions for when you need funds fast.
What is a credit card cash advance?
Taking a cash advance is done much the same way as making a withdrawal with your debit card. Instead of taking your own money out of your bank account, however, you borrow directly from your credit card. You may also receive checks in the mail from your card issuer that allow you to make credit card purchases via check payments. Again, this is not your money — the checks will pull funds from your credit card account.
What happens when you take a cash advance
Most credit card issuers impose entirely different terms on cash advance transactions. First, you will be charged a transaction fee, which will either be a flat rate or a percentage of the cash advance you’re withdrawing (typically between 2 percent and 5 percent). Additional ATM fees and foreign transaction fees if you’re out of the country may apply as well.
In addition to fees, you’ll likely be hit with a much higher interest rate. In some cases, the APR can be double the percentage for regular purchases. This catches many people off guard, since they’re unaware different terms apply for cash advances. The longer it takes you to pay off this amount, the more that hefty interest will pile up.
There is no grace period for cash advances, either. Typically, you have a month or so to pay off a credit card purchase in full before accruing any interest charges. This doesn’t happen with a cash advance — you pay interest starting the day you make the transaction.
Credit card companies also typically impose a separate limit on the amount of money you can take in a cash advance. This will often be much lower than your actual credit card limit.
How much will this actually cost you?
Let’s say you are going out for dinner with friends, and you need to get a quick $40 from an ATM using your credit card. First, you will be hit with the cash advance fee. Next, you will start incurring interest on that withdrawal immediately (possibly around 30%). Furthermore, the operator of the ATM may also impose its own fees, which can be anywhere between $3–$5 per transaction. You could be looking at anywhere from $10–$15 in fees for taking out $40 (and that’s assuming you pay it off by the next billing cycle). As you can see, that $40 dinner could wind up costing you $15 extra. Now imagine if you were borrowing $1,000 or more!
Alternatives to credit card cash advances
Simply put, you should always use a debit card to access cash instead of a credit card. Most major banks offer debit cards that can be used at in-network ATMs for no additional fees. In addition, many banks and credit unions are part of a larger ATM network that allows transactions for no additional fees.
If the issue is that you’re simply short on money, or stuck living paycheck-to-paycheck, a cash advance is not the solution. Instead, consider ways you can bring in extra income. Perhaps you can take up a part-time or side gig, sell a few items on eBay, or throw a big garage sale.
When is it Ok to take a cash advance?
A cash advance isn’t the best option, but if it’s your only option in an emergency, take it. Be sure to understand that there will be fees involved and that you need to repay the money you borrowed as soon as possible.
Cash advances should never be used for everyday expenses, “fun” money (shopping or gambling, for example), or even to make ends meet until your next paycheck. It can be all too easy to fall into a cycle of cash advances, which will ultimately lead to credit card debt.